Richard,
I just looked back at the data on the ratio as an indicator and
discovered that I should have been referencing post 10, not 9. It may be that there are only 5 or 6 people following this thread and this could explain why there have been so few responses to my post concerning the surplus that isn't.
In any event, the data presented does cover a period when the POG at least approached $300 (1982). I was therefore wrong in suggesting that it didn't cover a period where the price was so low as to result in mine closings. The Author of the article seems to indicate that the data covers the period between 1975 and 1993, the date of the article. He uses the price in 1982 in an example. But, I added up the weeks for which data is presented and the number is 539 or covers 10+ years. In any event, I believe that, to be statistically meaningful, the data for occurrences of a very low ratio would have to be much more extensive and cover a substantial number of occasions when the POG ratio was low. It is unclear but I think there were a maximum of two such occasions during the period indicated. I won't debate the detail as my MS in Math was granted nearly 50 years ago and the data may be better than I think.
I agree that the use of computer models and trading systems changes the ball game but the models and systems are no better than the people the created and use them. Computer trading has clearly had an impact but it is not clear to me that the systems do more than accentuate volatility. And, it seems to me that, for all of the computer models, the numbers of winners and losers hasn't changed. Incidentally, Armstrong's' computer models think/learn (use artificial intelligence). There must be others, but I'm not aware of any. I'm sure he would agree that they make mistakes.
I think there are some other factors that are of greater importance.
For a lot reasons (few, in my view, are the result of those now in
power; e.g., Reagan's corporate tax cut & the EURO) our economy is very strong and this has 1) made the dollar the strongest in the world 2) given our fiat currency policies credibility and 3) given more credibility to our system of free enterprise. Is it surprising then that young bankers have a different view of gold than those with white hair? And, isn't it reasonable the they use any means they can come up with to improve short-term profitability, including the loaning of gold.
I think we agree that Governments want to keep the POG and price of commodities from rising but why would Banks hold that view unless you are speaking of CBs. I recognize that you could argue that Banks want to keep interest rates low to maintain margins but isn't this only a short-term, special-situation consideration?
The most important area where we seem to see things differently is in the impact of forward selling or hedging by mining companies. Searle Sennett posted a response to Murphy today on the Dutch Bank thread with an argument that forward sales are bullish. I had argued that they are neutral but I think our difference is more semantics than real. My previous point was that, unlike short sales, forward sales don't have to be unwound. They can be maintained. Searle probably explains them better than I when he says they simply provide an off-set (of lower or higher profits) in time. They represent gold that the market has already absorbed. It is not clear to me that they are bullish; rather, I see them as increasing volatility since they will cause a variation in supply. But, they become very bullish if market expectation concerning the POG starts to improve because any unwinding will increase demand. However, I'm aware that forward sales have a very negative psychological impact.
Where I suspect I see things a little differently than Searle is in the impact of what I've come to think of as gold carry trade. I think of this as including the selling of borrowed gold with the expectation that the price will fall (conventional short selling) and the sale of borrowed gold to obtain funds for leveraged investments. The seller is in serious trouble in wither case if the POG rises but the trouble is compounded in the later. The fear of a rise in gold by those in this later situation will drive them to do almost anything, including the most illegal forms of collusion, to keep the price down. I think GATA is aimed primarily at these people/organizations. I assume that their interest in forward sales is primarily to motivate companies to cover and overcome any actions that short sellers have taken to hold the price down. If companies that are hedged can be convinced that the POG is going to rise, I would expect them to stop maintaining their forward positions and possibly reduce them. This would accelerate any rise. Clearly, a change in the market's perception could stimulate some shorts to cover and loans to called and stimulate a dramatic rise in the POG.
Actually, I think the gold carry trade, as I have defined it, is in fact bullish longer term. It represents gold that has been added to supply indicating that demand is larger than the real supply. It seems obvious that an interruption in the loan supply can have a dramatic positive impact.
Given the estimates of the amount of gold that has been loaned, I don't see why there is as much focus on the sales by CBs. It is small by comparison. Greenspan didn't speak of the price being held down by sales but by loans. If I could figure out what will motivate those with gold to loan to reduce the amount available, I think I could figure out when the price will move up.
Perhaps I agree more with your view that gold is stuck here more than I realize and that being a contrarian won't work for investing in the gold stock market. If being a contrarian means looking for an indication of the last seller, the last bull, means looking for the bottom. But, it appears that there are factors in play that can hold it there for an extended period of time. And, that one needs to look for a move off the bottom. However, if I'm close to right, you will have to be quick because once a real move up starts it should be major and quick.one needs to see a move up in the price to stimulate a lasting move.
Your turn.
Cheers,
Larry |
