osoab
15th December 2015, 05:45 PM
I like reading Kid Dynamite. A different insight.
Read it all at the link.
The Worst Precious Metals Meme of 2015 (http://kiddynamitesworld.com/the-worst-precious-metals-meme-of-2015/)
It’s been a while since I wrote a post designed to help the followers of the many precious metals charlatans out there who try to make a buck by selling lies and confirmation bias. Since it’s the holiday season, and I’m feeling generous, I figured I’d write a post about the most ignorant meme touted across the precious metals blogosphere in the second half of 2015. I want you to keep in mind, dear reader, that you will get the opposite of confirmation bias from this post. This post will clearly explain to you how the guru you hold in such high esteem is consistently demonstrating his own ignorance. The question for you to decide is: are you being misled out of ignorance (you’re listening to an idiot)? or malice (you’re listening to a con man)? Let’s get to it.
Have you seen a chart that looks like this, breathlessly ranting about the “COMEX Leverage Ratio” or “Paper Gold Cover Ratio” ?
http://kiddynamitesworld.com/wp-content/uploads/2015/12/zh_chart-300x183.png
In this post, I’ll explain to you why the chart is nonsensical, and thus why no one should be surprised that this ratio doesn’t correlate with the price of gold.
For background, I suggest you read an important post I wrote more than 2 years ago titled “Precious Metals Charlatans: Freaks of the Industry (http://kiddynamitesworld.com/precious-metals-charlatans-freaks-of-the-industry/),” where I explained how the then-goto-meme about the registered and eligible inventory at the COMEX was utter nonsense. Then, as now, we should start with the definition of registered and eligible metal. We don’t need to speculate on what the definition is, we can look it up right in the rulebook (http://www.cmegroup.com/rulebook/NYMEX/):
“Eligible” shall mean, with respect to any metal, that such metal is acceptable for delivery against the applicable metal futures contract for which a Warrant has not been issued”
“Registered” shall mean an Eligible metal for which a Warrant has been issued.
…
“Warrant” shall mean a document of title issued by a Licensed Facility, meeting the requirements of Article 7 of the Uniform Commercial Code (“UCC”), and demonstrating that the referenced quantity of the covered metal , stored in the Licensed Facility referenced thereon, meets the specifications of the applicable metal futures contract”
Let’s step back for a moment and review how the COMEX works. COMEX is an exchange. It matches buyers and sellers of futures contracts and facilitates settlement between the two. A COMEX future is a contract for the seller to deliver to the buyer, at a time of the seller’s choosing during the delivery month, the referenced underlying quantity of metal. For gold, this contract size is 100 ounces. The seller transfers the (electronic) warrant to the buyer, which satisfies the delivery requirements. In my prior post on the subject, I explained what we would see in the daily spreadsheet published by the COMEX (http://www.cmegroup.com/trading/energy/nymex-delivery-notices.html) that quantifies warehouse inventories:
“Now, after the long takes delivery, the long can do whatever he wants to with the warrant.
He may 1) detach the warrant (converting the metal from registered to eligible),
he may 2) take the metal out, bring it home, and bury it in his backyard,
or he may 3) simply hold it as is and sell his warrant next month (or not!).
What will we see in the depository inventory spreadsheet in each of those scenarios? 1) registered metal decreases while eligible metal increases. 2) registered metal decreases. 3) no change in either category.”
A recent example of that spreadsheet looks like this:
As we’ll see in a moment, the mistake these charlatans made was that they all started off as equating “registered” gold with the only gold available to be delivered. That’s false, and basing a thesis on this false foundation leads to a rabbit hole of nonsense and hype. All gold in the COMEX warehouse is available to be delivered, it just needs a warrant attached to it, which makes it registered. Here’s where some will get confused and think I’m making a nit-picking semantic argument, but I think it’s easily understood by the “square/rectangle” analogy. All squares are rectangles, but not all rectangles are squares. Similar, all registered gold is deliverable, but not all deliverable gold is registered.
But I want you to forget about that for a moment and focus on the practical reality of how the COMEX works. Every short on the COMEX who wishes to deliver metal has to acquire suitable gold, attach a warrant to it if it doesn’t already have one attached, and then notify the exchange of his intention to deliver. The authors who talk about “leverage ratio” “deliverable gold” or “gold available for delivery” are somehow assuming that there is some public pool of gold which shorts just rush to in order to make delivery, grab the gold as fast as they can – first come first served – and then whichever shorts don’t get their hands on gold are screwed and the COMEX defaults etc etc etc. This is false. (It’s worth noting that most of the authors above are careful to note that they don’t expect an imminent COMEX default, which is all the indication you should need that they’re well aware they’re spouting nonsense. After all, if this “Open Interest / Registered” ratio mattered, it would be impossible for any sane person to not think it would cause problems at the COMEX.)
Read it all at the link.
The Worst Precious Metals Meme of 2015 (http://kiddynamitesworld.com/the-worst-precious-metals-meme-of-2015/)
It’s been a while since I wrote a post designed to help the followers of the many precious metals charlatans out there who try to make a buck by selling lies and confirmation bias. Since it’s the holiday season, and I’m feeling generous, I figured I’d write a post about the most ignorant meme touted across the precious metals blogosphere in the second half of 2015. I want you to keep in mind, dear reader, that you will get the opposite of confirmation bias from this post. This post will clearly explain to you how the guru you hold in such high esteem is consistently demonstrating his own ignorance. The question for you to decide is: are you being misled out of ignorance (you’re listening to an idiot)? or malice (you’re listening to a con man)? Let’s get to it.
Have you seen a chart that looks like this, breathlessly ranting about the “COMEX Leverage Ratio” or “Paper Gold Cover Ratio” ?
http://kiddynamitesworld.com/wp-content/uploads/2015/12/zh_chart-300x183.png
In this post, I’ll explain to you why the chart is nonsensical, and thus why no one should be surprised that this ratio doesn’t correlate with the price of gold.
For background, I suggest you read an important post I wrote more than 2 years ago titled “Precious Metals Charlatans: Freaks of the Industry (http://kiddynamitesworld.com/precious-metals-charlatans-freaks-of-the-industry/),” where I explained how the then-goto-meme about the registered and eligible inventory at the COMEX was utter nonsense. Then, as now, we should start with the definition of registered and eligible metal. We don’t need to speculate on what the definition is, we can look it up right in the rulebook (http://www.cmegroup.com/rulebook/NYMEX/):
“Eligible” shall mean, with respect to any metal, that such metal is acceptable for delivery against the applicable metal futures contract for which a Warrant has not been issued”
“Registered” shall mean an Eligible metal for which a Warrant has been issued.
…
“Warrant” shall mean a document of title issued by a Licensed Facility, meeting the requirements of Article 7 of the Uniform Commercial Code (“UCC”), and demonstrating that the referenced quantity of the covered metal , stored in the Licensed Facility referenced thereon, meets the specifications of the applicable metal futures contract”
Let’s step back for a moment and review how the COMEX works. COMEX is an exchange. It matches buyers and sellers of futures contracts and facilitates settlement between the two. A COMEX future is a contract for the seller to deliver to the buyer, at a time of the seller’s choosing during the delivery month, the referenced underlying quantity of metal. For gold, this contract size is 100 ounces. The seller transfers the (electronic) warrant to the buyer, which satisfies the delivery requirements. In my prior post on the subject, I explained what we would see in the daily spreadsheet published by the COMEX (http://www.cmegroup.com/trading/energy/nymex-delivery-notices.html) that quantifies warehouse inventories:
“Now, after the long takes delivery, the long can do whatever he wants to with the warrant.
He may 1) detach the warrant (converting the metal from registered to eligible),
he may 2) take the metal out, bring it home, and bury it in his backyard,
or he may 3) simply hold it as is and sell his warrant next month (or not!).
What will we see in the depository inventory spreadsheet in each of those scenarios? 1) registered metal decreases while eligible metal increases. 2) registered metal decreases. 3) no change in either category.”
A recent example of that spreadsheet looks like this:
As we’ll see in a moment, the mistake these charlatans made was that they all started off as equating “registered” gold with the only gold available to be delivered. That’s false, and basing a thesis on this false foundation leads to a rabbit hole of nonsense and hype. All gold in the COMEX warehouse is available to be delivered, it just needs a warrant attached to it, which makes it registered. Here’s where some will get confused and think I’m making a nit-picking semantic argument, but I think it’s easily understood by the “square/rectangle” analogy. All squares are rectangles, but not all rectangles are squares. Similar, all registered gold is deliverable, but not all deliverable gold is registered.
But I want you to forget about that for a moment and focus on the practical reality of how the COMEX works. Every short on the COMEX who wishes to deliver metal has to acquire suitable gold, attach a warrant to it if it doesn’t already have one attached, and then notify the exchange of his intention to deliver. The authors who talk about “leverage ratio” “deliverable gold” or “gold available for delivery” are somehow assuming that there is some public pool of gold which shorts just rush to in order to make delivery, grab the gold as fast as they can – first come first served – and then whichever shorts don’t get their hands on gold are screwed and the COMEX defaults etc etc etc. This is false. (It’s worth noting that most of the authors above are careful to note that they don’t expect an imminent COMEX default, which is all the indication you should need that they’re well aware they’re spouting nonsense. After all, if this “Open Interest / Registered” ratio mattered, it would be impossible for any sane person to not think it would cause problems at the COMEX.)