A Midsummer Gold Rant (GLD)

You’ll have to forgive us, but once in a while we come across an investment ‘study’ that’s so full of trumped-up asininity that we’re forced to break our silence and speak out.

 

And that’s what we’re doing today.

 

The foolishness under scrutiny comes courtesy of a man whose credentials are otherwise solid and should therefore know better. But then again, isn’t it always the so-called experts who end up letting us down.

 

The Flooded Bookstore

 

I remember working in a used bookstore back in my college days when a fellow came in looking for an odd title that had to do with engineering air ducts in submarines, or some such. It turns out the man himself was an engineer and quite renowned, if his story was to be trusted.

 

In any event, we were having plumbing problems in the store at that hour, and as our discussion of sub-oceanic water pressures proceeded and the search for his book through various channels ensued, a shouting match between the store’s owner (a man with a very short temper) and the plumber, who turned out to be a gent exceedingly proud, grew in volume.

 

It continued apace and took a less than civil turn for several minutes before concluding with the plumber storming off to his truck, announcing vengefully – “I’m the expert here, Mr. Bookman! You know nothing about water. May your entire library get a good soaking!”

 

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Needless to say, the few patrons in the place were staring wide-eyed as the row gained intensity, and at least one elderly lady – according to the gasps and tight fists I witnessed – seemed on the very precipice of a pulmonary event.

 

There were no fisticuffs, thank goodness, and calm was quickly restored, but my engineer friend saw the matter in a most interesting light. And he offered the following in a whisper.

 

He said, “Any time someone tells you he’s an ‘expert’ – run away. I can say that because I’m also an ‘expert’. And I can assure you that the damage that’s been done in the name of ‘expertise’ is far greater than any small-time fidgeter could ever accomplish. An ‘expert’ that plumber may be. But if I were your boss, I’d fire him immediately.”

 

I thought about it. There are countless examples of this sort. It’s rarely, if ever, that old, reliable uncle Jim fouls up on the new addition to your house. It’s rather that contractor with 25 years experience and a desire to cut a corner here or there that leaves the whole project in a heap after the first heavy snowstorm.

 

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It’s the master economist with PhDs from the finest institutions who gets the call wrong on interest rates and costs everyone an arm and a leg when the market goes to hell.

 

It’s the military ‘genius’ – a West Point ‘First’ – who ends up leading his division into an obvious trap, losing thousands of lives and myriad appendages and prisoners taken along the way.

 

In short – don’t trust the experts.

 

In our case, the expert is a man called Paul Craig Roberts. He penned an article with another chap called Kranzler that can be found here and is absolutely hysterical in both its premise and execution.

 

If you have a quarter hour to waste, please read it because it demonstrates the lengths to which gold bugs are willing to travel and the phony arguments and fallacious conjurings they’re willing to employ to prove that a falling gold price is as unnatural as a 28 hour day.

 

In essence, their argument goes like this:

 

  1. There are two gold markets, one for physical gold and coins, and one for traded paper that represents gold ownership (the futures market).
  2. That the existence of the futures market in and of itself artificially depresses the price of gold, such that
  3. Even when there’s an apparent scarcity of real coins and bullion bars in the so-called ‘physical’ market, the price of the metal keeps falling on the futures market, when it should be rising.

 

The problem with the arguments proffered above is manifold.

 

In the first place, it’s dubious at best to posit the existence of two gold markets, each operating independently of the other with no interaction between them.

 

The truth is, the ‘physical market’, as they term it, simply pales in comparison with the vast, daily commercial exchange of gold on the COMEX. But our experts conveniently ignore that fact.

 

They prefer to cite ongoing shortages at the U.S. Mint as evidence of a supply constraint that should be indicative of higher prices.

 

But did it never occur to these oafs ‘experts’ that some managerial genius at the mint might also be responsible for the foul-up? Elsewhere, they’re quick to point up the inefficiencies of big government and the lack of professional oversight as compared to the private sector. Why not at the mint? Why isn’t some goof-off purchasing manager to blame for insufficient inventory in the bloody mint? Our experts avoid the possibility.

 

The truth, as we all know, is that bullion coins are bought by small time investors who have a penchant to purchase their wares at the highs, or at moments of hope (and hype) that a new bull move is about to be launched.

 

Take a look –

 

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This is the same cohort that subsequently gets nailed when prices retreat.

 

Our whacko duo then continue with this gem –

 

Precious metal prices are determined in the futures market, where paper contracts representing bullion are settled in cash, not in markets where the actual metals are bought and sold. As the Comex is predominantly a cash settlement market, there is little risk in uncovered contracts.

 

Unbelievable. An uncovered contract possesses ‘little risk’.

 

Completely asinine. (Our friends have clearly never been caught on the wrong side of a margin call.)

 

And that’s why traders are apparently loading up on naked short sales and driving the price of bullion lower in a completely artificial (and risk-free) manner.

 

Is there any self-respect here?

 

The Truth about the Gold Fools

 

The reality behind all this specious drivel is that these two backslappers have told too many people to load up on gold and have lost them all money.

 

So they have to say something.

 

So they blame the futures market itself for the decline in prices. As if speculative excess cannot occur among gold buyers. As if the 2011 peak price for gold was not precisely the product of such a speculative excess. As if there were something subversive about a short sale or falling prices. Hell, the entire commodity complex has been in a freefall for half a decade, but our overly-credentialed arsefied writing duo say gold should be rising?! Why? Because some twitter-brained sigmoid at the mint can’t count?!

 

For these clowns a market mechanism that permits gold prices to rise is perfectly acceptable. But when that selfsame mechanism causes prices to drop, well… it’s ‘artificial’ because it doesn’t align with the fundamentals of economics as we define them.

 

Melonheads.

 

The futures market is a zero sum game, ya rotweiler – for every winner there’s a loser, for every long, a short.

 

So long as there are fools willing to take the long side of the trade in a falling market, so long the market will fall.

 

And only when the buying stops – and the sellers are exhausted – will the gold bull resume.

 

Until then, get out of the way.

 

And avoid austere looking charlatans.

 

Options Trader Elite offers no trade this week.

 

With love of the hunt,

 

Hugh L. O’Haynew, Senior Analyst

See what people are saying...

  1. Lew Hodgerney

    Just want to say that I enjoy your insights and was wondering, since I hadn’t gotten anything in a few weeks, where had you been? Thanks-Lew H

  2. jerry alderman

    ARTFULLY WRITTEN AND TRUE. BUYING INTO A FALLING MARKET WILL GET A MARGIN CALL , BEEN THERE, DONE THAT. JERRY

  3. HMM

    Your premise that the futures market for commodities (such as gold or silver) doesn’t exist separately from the physical market is patently incorrect.

    If you were a farmer (of any commodity sold on the futures exchanges), you would realize a distinct difference exists between the two.

    I realize you don’t have this experience, so naturally you wouldn’t know. You might want to discuss this distinction further with someone who is more knowledgeable and can take the time to explain it to you.

    As to whether your opinion here about the gold price is correct or incorrect, I have no vested interest in debating your perspective since I am not a gold bug. Obviously, almost all commodities run in cycles…sometimes spanning many years. Live Cattle markets are a good example of such a situation where the highs of 80 in the late 1970s took many years to be exceeded. Very few traders ever thought they would be…ditto beans.But…inflatio and the devaluation of the dollar trumped.

    Best of luck trying to understand the physical market for commodities.

    Sincerely,
    HMM

    • Mcabby Matt

      Dear HMM, thank you, too, for writing, but spare us the lectures. If you mean to tell us that Russell Kattel, the local beef farmer, can sell us meat for $12.50 a pound while the futures market has it going for $14.00, then you haven’t accomplished much. But if you take it a step further and argue – as Roberts does – that the futures market is WRONG because it costs you less to buy beef down the road, then you likely have a very serious cerebral malfunction. It’s simply a ludicrous argument. And anyone who abides by such thinking should have his stem cells replaced.

  4. Joe

    Well…. we’ll see who’s right- eventually

  5. George

    I do not know about these gold bugs but they are right that there have been some large naked shorts bought during the evening hours when our regular markets are closed. Naked shorts are allowed on gold but not on most other markets that I know of. Are you saying this is not so?

  6. George

    My comment is awaiting moderation? Can you please tell me what that means?

    • Mcabby Matt

      George, ‘awaiting moderation’ means you were too radical. Tone it down. And as for naked short sales, they’re everywhere and always a good thing, providing additional liquidity where there otherwise wouldn’t be any. The only people crying foul over short-sellers are the longs. Remember, too, futures are a zero sum game — there’s a long for every short, and everyone has the exact same 50-50 chance of losing his shirt when he lays down his money.

  7. E.B Goldman

    Did the water problem in the bookstore get fixed by the Masked Master Plumbing Ranger who came by in a white canoe paddled by a faithful Indian Companion?

    • Mcabby Matt

      As for you E.B. Goldman, how dare you insult our Native American brothers?! They’re no longer ‘Indians’, friend. Come to think of it, no one is what they once were…

  8. Reg

    I read , with interest , both Mr Roberts article and your rebuttal. I am aware and fully understand that everyone has their own agenda. I don’t have a problem with that. That is
    the way the world operates. I must say however , that your position was both offensive
    and arrogant . I have read and re-read both articles 5 times and come to the conclusion
    that your effort to defend your position is a weak one. You have left many unanswered questions !!! Opinions are not facts. I found your article to be a distraction from the facts.
    Thank you

    • Mcabby Matt

      First up is brother Reg, who casts aspersions left and right without taking issue with anything but our tone. Please do tell us Reggie-boy, how exactly our ‘position’ was offensive and arrogant. And while you’re at it, which questions were left unanswered? and where did you find opinions without facts? Maybe another five read-throughs will offer additional clarity.

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