(Click here to read this article in pdf format: April 8 2013)

It is hard to make sense of the markets these days. For instance, gold showed no support while the geopolitical situation in Asia deteriorated, Japan embarked in the mother of all monetization programs, and a member nation of what is supposed to be a monetary union was imposed controls on the movement of capital. Or take the case of the Euro, which jumped from $1.2750 to $1.2950 on the day of one of the most confusing and embarrassing press conferences the president of its central bank ever gave.

However, in a faraway land, where there is no shadow banking, leverage or even capital markets, economic fundamentals still hold, which and can help us, inhabitants of the developed world, visualize a dynamics lost in the shelves of our collective memory. The land I am referring to is Argentina, but not Argentina of 2001. Today, I want to write about Argentina of 2013, and no, I will not discuss their legal battles with Mr. Singer.

Introduction

The topic I want to bring your attention to refers to an earlier article titled “What causes hyperinflations and why we have not seen one yet” (December 18^th, 2012). In it, I drew a few conclusions; the most relevant of which was that high inflation and high nominal interest rates are not incompatible, but on the contrary…they go together: There cannot be hyperinflation without high nominal interest rates. The article suggested that high interest rates are the product of a collapse in confidence, represented by a serious shrinkage of the deposit base in a currency jurisdiction. But the article was not exhaustive. It was limited to pointing out fear of confiscation, as the driver behind the collapse in confidence. This will be the driver behind the Euro zone break up. But there is another driver and Argentina of 2013 may be a template for the US. Bear with me…

Fear and greed

When human beings act/decide/choose, they face a risk/return trade off. When choosing whether or not to leave their savings deposited in a bank, indeed their decision can be driven by fears of confiscation. In other words, at a given return (almost 0% nominally and negative in real terms these days), if risk is perceived as too high, deposits will decrease or at best and at the margin, not increase. That was the scenario contemplated in my earlier article.

The most catastrophic example of the fear scenario is the monetary developments at the fall of the Roman Empire, when depositors took their monies and dug holes in the backyards of abbeys to hide them from either the tax man or barbarian hordes. However, the earliest documented example (by Isocrates; discussed by Prof. J. Huerta de Soto in his great book “Money, Bank Credit and Economic Cycles”) of this scenario dates back to 393BC and took place in Athens, triggered by the war with Sparta and the victory at Thebes, when Passio, an Athenian banker could no longer hide the insolvency of his bank (Demosthenes seems to indicate that Passio had a leverage ratio of approx. 5 to 1). He was not alone. A general run also against the banks of Timodemus, Sosynomus and Aristolochus ensued and it resulted in a deposit freeze that lasted 10 years (ref. Bogaert, Banques et banquiers dans les cités grecques). Those who feared first, feared best.

Fast forwarding some 2,406 years to 2013, what I missed in my earlier article (although it was implied in subsequent ones: i.e. on gold manipulation) is the “return” or greed component of the decision to shrink deposits. By this I mean that, for a given, known and manageable risk, if the return is perceived as too low, the deposit base can also shrink.

The perception of a low return will be shaped in relative terms. If there is an alternative to placing savings in a chequing account, for same or lower risk, the deposit base will shrink. In the developed world, courtesy of the creation of fiat gold and the volatility it generated around the price of the metal, such alternative is still non-existent. This was the smartest move of central bankers. But with the Cyprus event and others to come, without a Plan B, even this volatility can be ignored in favour of a longer term view on gold.

Argentina 2013

An example of falling deposits driven by greed rather than fear is Argentina in 2013. Depositors there learned the “fear lesson” already 12 years ago and for that reason, today a US dollar under the mattress is always worth more than a US dollar deposited in a bank. But the story didn’t stop there. Later on, as it became increasingly evident that the confiscation by the government had not ended with the default of 2002, the US dollar market saw another segmentation.  As the government competed with the public to source US dollars (to repay whatever was still left outstanding on their debt) and those dollars were out of the system, it decided to prohibit access to them in open markets. The repression began in earnest about a year and a half ago. For that “national and strategic” cause, even US dollar sniffing dogs were recruited to search for any US dollar bills, out of the system (watch here and here)

Since then, the market broke and there’s the official US dollar price, where of course you find no sellers, and the market price (for an unknown reason, called the “blue” market).  The graph below (source: Reuters/La Nación) does not need additional comments; it is self-explanatory. Today, while an official US dollar is worth about 5,15 pesos, the market demands about 8,50 pesos, or a 2/3rds premium.

 

So far, you will be asking yourselves how this can be a template for the US. And you would be right: The gold market is still one and the US government will never have to compete with the public to source physical gold to repay its debt, which is denominated in US dollars. But there’s more to it..

Why it can be a template

But let me get back to my initial point: Deposits can also fall driven by greed, rather than fear. In Argentina of 2013, deposits in pesos are now starting to contract exponentially, not driven by fear but by greed. Why? Argentines observe the escalation in the price of the US dollar bill outside the system (+25% YTD) vs. the interest paid on peso denominated deposits (-10% in real terms) or stocks (+18.5% nominally), and correctly figure out that they are better off with a king-size mattress than a bank account. Now, that to me is likely to be a template of what may happen in the US, once the market for fiat gold collapses. Here’s why: If the fiat gold market broke in a run for physical gold, the credit multiplier on paper gold would be crushed and from that moment onward  depositors in US dollars all over the world would see the performance of gold as a benchmark against US dollar deposits, just like Argentines today regard US dollar bills as a benchmark against their peso deposits. This is every central banker’s biggest nightmare: An asset whose price shapes inflation expectations.

The likely outcome of this would be an initial fall in USD deposits and a rise in interest rates, as the USD unsecured funding market would dry. Following this, the Fed, just like I am expecting the central bank of Argentina to do, would be dragged into a deficit (I am not going to explain here the mechanics of the deficit of a central bank. The reader may want to see my last article on hyperinflation, mentioned above).

As Argentina is at the gates of a new hyperinflationary process, it would be wise to follow it closely. It is a template. There are two conclusions that come to mind:

Conclusion No.1 : The Fed/US government would be better off not confiscating gold

Counter intuitively and contrary to the belief of the gold bug community, the US government would have every motive NOT to confiscate gold, for in so doing, they would trigger a run for physical gold and lose every leverage they have to suppress its price. This conclusion should hold even if a run for physical gold took place for other reasons. Their best move is to keep the suppression of the price of gold via fiat gold as long as possible.

Conclusion No. 2: The Fed would be more pressed than Argentina’s central bank to run a deficit

With the peso as a local currency, the pension funds nationalized, the absence of shadow banking and capital markets, if deposits in pesos drop, the central bank of Argentina does not worry about systemic contagion. As nobody there relies on the banking system to fund their businesses, the drop in deposits would likely end up affecting the profitability of the banks, with a high probability of seeing a complete nationalization of deposits.

The Fed however would be multiple times more pressed to intervene. Its liabilities affect credit and commodity markets worldwide, the pension and money market funds would be at the risk of collapsing. The high leverage of the shadow system would be too much. Therefore, the Fed would have to subsidize not just the US but the global banking system, to maintain US dollar deposits as a competitive alternative to gold worldwide. (Once more, to see how this would take place, please see this link)

Why I disagree with Martin Feldstein

Continuing with the topic of rising interest rate, in this recent article (link), Martin Feldstein expressed his concerns on the subject. Unfortunately, he does not explain how he sees that rise being triggered. He simply begins with “When interest rates rise…”. Unlike him, I have been explicit at least since December 2011: To me, the most likely driver is a wave of corporate defaults coming from the Euro zone, forcing the Fed to become the lender of last resort (in fact, they already are) and triggering a repudiation in US Treasuries. As a consequence, the repudiation of US Treasuries would further spark the fall of the money market and probably that of a commodity market clearinghouse.  In this context, the price of gold would not fall as Mr. Feldstein predicts.

In my scenario, before (i.e. independently of) the rise in rates,  credit spreads would rise as defaults increase. Markets would realize that the Fed is no longer in control and that the transfer of losses to the public sector are no longer bearable and the Fed would be forced to buy any US Treasury the market sells.

Martin Feldstein’s story has the opposite narrative thread. According to him, rates will rise and defaults will follow. In his words: “…Long-term interest rates are now unsustainably low, implying bubbles in the prices of bonds and other securities. When interest rates rise, as they surely will, the bubbles will burst, the prices of those securities will fall…”

How does Mr. Feldstein expect that rates to rise? Not because the Fed raises them, but because inflation expectations would drive nominal rates higher: “…If inflation turns out to be higher (a very likely outcome of the Fed’s recent policy), the interest rate on long-term bonds could be correspondingly higher…”

Mr. Feldstein omits to tell us what he thinks would cause inflation to be higher than the 2% targeted by the Fed, but my guess is that he has the mainstream economics model in his mind, whereby as the output gap decreases, prices increase. I will have more to say about such models in subsequent letters, but for today, let me end with this: There is no such a thing as an output gap. The notion of its existence is an ad-hoc mental tool, which dismisses the role of the price system in allocating resources.

Martin Sibileau

Please, click here to read this article in pdf format: March 29 2013

At the end of my last letter, I anticipated I would devote the next one to explain why, in my view, the European Central Bank is hypocritical on the Cyprus situation and why the rest of the periphery has to expect the same fate than Cyprus. Fortunately for me, Mr. Joeren Dijsselbloem who is both Dutch Finance Minister as well as the leader of the Eurogroup of Finance Ministers, confirmed my second point in a press conference 24 hours later, making my work easier…

A quick view of a bank’s capital structure

There are multiple issues on the Cyprus event. Perhaps the most relevant is the fact that unsecured depositors were sacrificed because their banks did not have enough subordinated debt to bail in. For this reason, the official story goes, Cyprus is a special case. Let me explain this point. In the figure below, I show the stylized version of the capital structure of a bank. From top to bottom, every portion of it is subordinated to the one immediately above it. It is clear that the least subordinated should be the deposits that finance a bank.

 

What is clear to us was not clear to leaders of the European Union. At closed doors, they first decided that deposits above EUR100M would arbitrarily lose 9% (in spite of existing subordinated debt to bail in) and put the matter to vote….only to revise this figure a week later up to 40% and without voting. It was hardly an ordinary bankruptcy proceeding; banks did not go through an ordinary liquidation and nobody could see an actual market appraisal of recovery values across the capital structure. The portion of such structure, which was supposed to be the most protected, saw its recovery value fluctuate between 9% and 40% within days because folks who live far away from this drama decided so over a weekend. On the other hand, those who held deposits of amounts below EUR100M are only entitled to them nominally. Effectively, they cannot withdraw their monies, let alone send them outside Cyprus. If they hold demand deposits believing that they can serve as medium of indirect exchange and they cannot use them precisely for that function, their property was affected, regardless of what the official story says.

Let’s return then to the thesis that Cyprus is a special case because the subordinated debt of its banks did not provide with enough cushion in the liquidation. As you can see from the figure above, the thicker the subordinated debt tranche is they lower the likelihood that unsecured senior debt and depositors will be affected. If Cyprus is a special case and it is not a template for the rest of the Euro zone banks, then it must be true that the rest of the Euro zone banks have stronger tranches below that of depositors. The sections below will show that during the last year (since March 2012):

a)   The same Euro zone authorities that imposed the loss on unsecured depositors were the ones who enabled a cash-out of subordinated debt holders, leaving depositors exposed to the firing squad,

b)   The Fed has been the ultimate enabler of this situation, and

c)    The fate of the US dollar is indirectly coupled with the fate of the Euro zone = There is no place to hide.

How the ECB financed the exit of subordinated debt holders

In December of 2011 and February 2012, the European Central Bank (ECB) extended longer-term refinancing operations to provide liquidity to euro zone banks. The liquidity, in euros and at a below market price, was against sovereign debt held by the banks, as collateral. Part of this liquidity was used for what is called “liability management” exercises, where the banks changed the composition of their liabilities: They borrowed from the ECB to repay their subordinated debt holders. This is the reason why Cyprus should actually be a template for the rest of the Euro zone. Because across the Euro zone, subordinated debt was reduced, leaving unsecured depositors exposed….again, across the Euro zone. The figure below, with the aggregate balance sheets of the main players, should help visualize what happened during the last twelve months:

In step 1, we see the focused balance sheet of the Euro zone banks and their subordinated investors (i.e. holders of subordinated debt), with regards to the subordinated debt. The same is a liability to the banks and an asset to the investors.

In step 2, we see the aggregate change caused by the extension of the LTRO Loans (i.e. loans issued under longer-term refinancing operations, by the ECB). These loans are an asset of the ECB and a liability to the banks.

 

Against these loans, the ECB issued Euros, which are an asset of the banks and a liability to the ECB.

In step 3, we see the transaction that I hold responsible for allowing unsecured depositors to be fair game across the Euro zone. With the Euros loaned by the ECB, banks bought out subordinated investors. Unfortunately, I have not had the time to quantify the exact impact of this transfer to date. However, reviewing past research notes released at that time (March 2012), my point will be clarified. (ADDENDUM: I HAVE BEEN GENEROUSLY FORWARDED TO THIS LINK, WHERE ZEROHEDGE.COM DID THE MATH ON THIS POINT, PROVIDING AN UPDATED STATUS ON THE ISSUE) 

On March 28^th, 2012, Barclays’ Credit Research team had published a report titled “European Banks: Liability management shrinks the bank capital market”. In it, it was estimated that at the end of March (only one month after the second LTRO), about 20% of the subordinated debt (equivalent to EUR97BN) had been targeted for exchange. The average exchange ratio of the transactions had been calculated at 82% of par (74% for Tier 1 and 89% for Lower Tier 2).  The reductions were split as follows: Close to 35% of cash out in the Tier 1 market (EUR54BN), 12% reduction of the Lower-Tier 2 (EUR37BN), and 18% reduction in Upper-Tier 2 (EUR6BN).

According to Barclays too, all the transactions had been bondholder-friendly, with an average 7pt (i.e. 7%) premium to secondary market across all issues (9pts for Tier 1, 5pts for Lower Tier 2). The main motivation behind all the transactions was capital optimization. They created capital gains to the banks. Except for two transactions in which the subordinated debt was exchanged for common stock or new Lower Tier 2, the rest were all tenders for cash. Greek banks in particular (i.e. National Bank of Greece, EFG Eurobank and Piraeus Bank) also participated in this liability management exercise; in some cases (i.e. Piraeus’s Prefs at 37 and LT2 floater at 50, announced on Mar 7/12) at premiums ranging 10 to 17pts.

In other words, both banks and subordinated debt holders enjoyed great capital gains, leaving unsecured depositors exposed to higher risk. This played out in the context of a virtuous cycle, where the cheaper funding improved the risk profile of the financial institutions and attracted capital back to the Euro zone. In the process, both the Euro appreciated and the EURUSD basis tightened, which further strengthened the equity of the financial system. The depositors of course, continued to receive mere basis points for their trust. On May 29^th and later on June 25^th, I had warned about the danger of this outcome.

But the story did not end here. In steps 4 and 5 of the figure above, I show the impact the Fed had in all this with its quantitative easing policy. By literally printing money in US Treasuries purchases, it added fuel to the fire, because Euro zone banks took advantage of the situation to borrow cheap US dollars, helping them repay their LTRO loans. Zerohedge.com has explained this with more detail than I can provide in this note, (in chronological order) here, here and here. I recommend that you read these articles in detail, if you want to understand how the game is going to end.

Step 6 seeks to show the status quo after the party. If the Cyprus situation is contained (which I doubt), going forward we should see the reduction in both assets (i.e. LTRO loans) and liabilities (i.e. Euros) at the balance sheet of the ECB and the banks, with banks replacing LTRO repaid loans with unsecured USD funding.

The Fed as the ultimate enabler tied the fate of the USD to the Euro

If you noticed, I circled the US Dollars held at the balance sheet of the Euro banks in step 6 of the figure above, as an asset. I did this because I want to emphasize a point I have been making for a long, long time: The collapse of the Yankee bond market (i.e. the market for bonds denominated in US dollars, where the borrowers are non-US resident corporations), caused by corporate defaults in the Euro zone will unmask the exposure that the Fed has to the fate of the Euro zone.  The dollars that end up with the Euro zone banks get recycled in multiple ways and one of them is via the Yankee market (another one is of course the USD loan market).

It should be clear therefore that this whole transfer of wealth will ultimately (and irresponsibly by the Fed) end up exponentially (through leverage) affecting those holding their savings in US dollars.

 

Final words

I am confident that the story above shows that far from being a unique situation, the fragile exposure of unsecured depositors across the Euro zone is the norm; and that their fragility was further increased in the last twelve months thanks to policies created by the same authorities who now refuse to honor their promise of a banking union, and instead impose capital controls, which have effectively destroyed any credibility on the safety of capital in the Euro zone.

One last word of caution: I think it would be wrong to interpret from the process depicted above that there was a premeditated conspiracy on the part of policy makers to weaken the position of depositors. This outcome, I believe, was simply an unintended consequence in their efforts to sustain the Euro zone. However, even if one accepts my view, the unintended outcome begs the following question: Why was there cheap money available for subordinated debt holders to cash out, but there is none now to protect the savings of depositors? Nobody can answer that question but with speculation, and as such, intellectual honesty demands that I keep mine to myself, because as Mark Antony said in Shakespeare’s “Julius Caesar”: “…You are not wood, you are not stones, but men; and being men, it will inflame you, it will make you mad”.

Martin Sibileau

Please, click here to read this article in pdf format: March 24 2013

This has been a very busy week for me but I did not want it to go by without leaving a few comments on the Cyprus situation. (It’s 6am ET on Sunday, as I begin to write and will not have time to appropriately edit the comments below. Please, accept then my apologies)

First, let me say that the best coverage of the crisis so far could and continues to be found at Zerohedge.com. Almost every angle of the crisis was analyzed either by Zerohedge.com or guest posts at Zerohedge.com, which puts me in the difficult position of avoiding regurgitation. Therefore, I will not discuss facts here today. I assume that at this point readers are very aware of what goes on there. If they are not, I invite them to first read the excellent coverage from Zerohedge.com and then follow my comments below.

Why Cyprus 2013 is worse than the KreditAnstalt (1931) and Argentina 2001 crises

The Cyprus 2013, like any other event, can be thought in political and economic terms.

Political analysis: Two dimensions

Politically, I can see two dimensions. The first dimension belongs to the geopolitical history of the region, with the addition of the recently discovered natural gas reserves. The historical relevance goes as far back as 1853, the year the Crimean War began. The Crimean War took place in the adjacent Black Sea, but the political interest was the same: To avoid the expansion of Russia into the Mediterranean. The relevance of this episode was the break-up of the balance of power established after the Napoleonic Wars, with the Congress of Vienna, in 1815. From then on, a whole new series of unexpected events would lead to a weaker France, a stronger Prussia, new alliances and a final resolution sixty years later: World War I.  It is within this same framework that I see Cyprus 2013 as a very relevant political event: Should Russia eventually obtain a bailout of Cyprus (as I write, this does not seem likely) against a pledge on the natural gas reserves or a naval base, a new balance of power will have been drafted in the region, with Israel as the biggest loser.

The second political dimension refers to a point I made exactly a year ago, precisely inspired in the KreditAnstalt event of 1931. In an article titled: “On gold, stocks, financial repression and the KreditAnstalt of 1931” I wrote:

“(The KreditAnstalt event) was triggered because France, a public sector creditor, introduced a political condition to Austria, in exchange for a bailout of the KreditAnstalt. Today, like in 1931, in the Euro zone, the public sector is increasingly the creditor of the public sector. In 1931, England and France were creditors of Austria and demanded conditions that no private investor would have demanded.

Private investors live and die by their profits and losses. Politicians live and die by the votes they get. Private investors worry about the sustainability and capital structure of the borrower, the collateralization and the funding profile of their credits. Politicians worry about the sustainability of their power. It’s a fact and we must learn to live with it.

In 2012, Greece and increasingly other peripheral EU countries owe to other governments, the IMF and the European Central Bank. Private investors have been wiped out and will not return any moment soon. We fear that just like in 1931, when the next bailout is due either for Greece again or Portugal or Spain, political conditions will be demanded that no private investor in his/her right mind would ever have demanded. Think of it…What in the world had the customs union between Austria and Germany in 1931 had to do with the capitalization ratio of the KreditAnstalt??? Nothing! Yet, millions and millions of people worldwide were condemned to misery in only a matter of days as their savings evaporated! Ladies and gentlemen, welcome to the world of fiat currencies! You have been warned! If months from now you read in the papers that the EU Council irresponsibly demands strange things from a peripheral country in need of a bailout, remember the KreditAnstalt. Remember 1931.

Please, understand that this is not a tail risk. The tail risk is precisely the opposite. The real tail risk here is that when the next bailout comes due, politicians think like private investors and give priority to economic rather than political considerations. That’s the tail risk! If such a crisis occurred, the media will speak of increased correlations and tell you that everything is actually fine on this side of the Atlantic. But if you read us, you will know that all that led to such a situation was perfectly foreseeable and nothing is really fine on this side of the Atlantic either. You will have remembered 1931…”

At this point, I think all is said and I have nothing else to add. My worries a year ago are proving too correct.

Economic analysis: Confiscation and two broken promises

Cyprus 2013 is worse than the KreditAnstalt and Argentina 2001 crises because it has an element of confiscation and two broken promises that were absent in the latter.

Confiscation

Neither in 1931 or in 2001 were the depositors in Austria or Argentina subject to an explicit and arbitrary confiscation of their savings by their fellow representatives, meeting at a Parliament. This is a totally new element of violence in the drama. Back in 1931 and in 2001, depositors simply run against their banks for price discovery: to discover the true value of holding US dollar bills –physical- vs. their respective fiat currencies (shillings and pesos). That was all what these exercises (i.e. runs) were about. The governments did not intervene to distort the final discovery. In the ‘30s, through contagion to the US, such discovery allowed depositors to realize that their US dollars were worth a lot less than 1/20.67^th of an ounce of gold. In the 21^st century, the final act of the same game will see holders of fiat gold realizing that there is a premium for physical gold.

Both in 1931 and 2001, governments intervened only to slow down the process of price discovery. But could not change the outcome of the same. In the case of Argentina, with a credit multiplier for US dollars of 1/0.3 (30% was the reserve ratio), the US dollar ended trading at 3 pesos by 2003. Nobody should have been surprised in Argentina therefore, that the peso lost 2/3rds of its value vs. the US dollar. The devaluation was not a confiscation. Depositors did not bail out their banks or the government. Depositors simply suffer a market priced transfer of wealth that benefited those who held physical US dollars. And neither the banks nor the government had physical US dollars. That’s why they both went bankrupt.

In Cyprus 2013, depositors have no clue as to what the final recovery of their capital will be. The expected losses have no connection with a public credit multiplier (In Argentina everyone and their grandmothers knew that as of March 1995, by regulation of the central bank, for every three fiat US dollars circulating there was only 1 real US dollar as backup). In Cyprus, the final recovery is being “debated” at this moment by members of Parliament and is consulted to powers outside the country, in Brussels, in Berlin, in Washington DC and in Moscow. This is far worse. This will bring an element of social conflict, of resentment, that will not be easy to appease.

Broken Promise no. 1: The promise of a banking union

During 2012, real efforts were made by policy makers to convince the public that the Euro zone was shifting towards a banking union first, as the stepping stone to a political union. The cornerstone of that promise was the role of the European Central Bank as lender of last resort. It had to be an unanimous promise; a promise to every jurisdiction. For all practical purposes, it should matter very little what the GDP or population of a member of the union is. In fact, if the European Central Bank can not come up with the EUR5.8BN package that is claimed to be minimally needed to kick the Cypriot can down the road….what can we expect when this problem gets to Italy, which doesn’t even have a government to negotiate with yet???

In 1931, the promise of international support for Austria was only implicit. In 2001, the promise of a lender of last resort was explicitly absent in Argentina. Nobody in either Austria or Argentina had never expected anything. Nobody was promised anything. Nobody was let down. This is not the case in 2013.

 

Broken Promise no. 2: The promise that deposits below EUR100,000 are guaranteed

Perhaps I missed something here, but as far as I know, I never saw Mario Draghi calling for a press conference to say: “Dear depositors of Euros in the Euro zone: As long as this central bank I preside exists, regardless of geography or political circumstance, any deposit up to EUR100M is guaranteed by my institution”. If I missed such message, please, accept my apologies and be kind enough to send me the link to watch it online (I cut my cable tv subscription last year, in the interest my kids’ education).

The promised EUR100M deposit guarantee has not been openly defended in Cyprus 2013. To my knowledge, there was never such a promise either in 1931 or in 2001. Therefore, Cypriot depositors were left in the cold far worse than their counterparts in Austria or Argentina, whose expectations had never been high.

Final thoughts

If you look at the case of Argentina 2001, you will realize that it was a pretty clean bet. In Argentina, the reserve ratio on US dollars was known: 30%. We all knew that the USD deposits had been loaned out to the government and that the government faced a significant probability of default. Banks however offered depositors of US dollars a 20% p.a. interest rate. Therefore, an Argentine depositor was faced with a clean bet: Earn 20% p.a. vs. the probability of losing 2/3rds of capital. If you thought that the probability of default of the Argentine government was beyond four years, you would play the bet with a chance of winning it.

What are depositors of Euros faced with today? Anything but a clean bet! They don’t know what the expected loss on their capital will be, because it will be decided over a weekend by politicians who don’t even represent them.  They don’t really know where their deposits went to and they also ignore what jurisdiction they really belong to. Finally, depositors are paid mere basis points for their trust in the system vs. the 20% p.a. Argentina offered in 2001 (thanks to the zero-interest rate policies of the 21^st century). In light of all this, I can only conclude that anyone still having an unsecured deposit in a Euro zone bank should get his/her head examined!

(Unfortunately, I don’t have more time to write. In the next letter therefore, I will have to explain two very important points: Why the European Central Bank is hypocritical in this situation and why the rest of the periphery has to expect the same fate than Cyprus. The explanation will be technical, touching on a brief discussion on bank capital structure and showing how the long-term refinancing operations offered by the European Central Bank in 2012 were a bail-out to both subordinated debt holders and shareholders, at the expense of the unsecured depositors, constituting one of the most perverse wealth transfers on record).

 

Martin Sibileau

Please, see important disclaimer/ note at the end of this article:

To read this article in pdf format, click on the following link: March 16 2013

This is the third and last of three articles I am posting on the price suppression of gold. In the first article I showed that, under mainstream economic theory, the suppression of the gold market is not a conspiracy theory, but a logical necessity, a logical outcome.  Mainstream economics, framed by the Walras’ Law, believes in global monetary coordination which, to be achieved, necessitates that gold, if considered money, be oversupplied. The second article showed, at a very high (not exhaustive) level, how that suppression takes place and how to hedge it (if my thesis is correct, of course). Today’s article will examine the systemic impact of this suppression and test the claim of the gold bugs, namely that physical gold will trade at a premium over fiat/paper gold, commensurate with the credit multiplier created by the bullion banks.

I see two complementary ways to approach the systemic impact of gold manipulation. The first one would be to examine how the same affects the relevant prices. The second one would be to analyze the flows involved in the manipulation. With both ways, we should be able to reach a final conclusion on the sustainability of the manipulation. I will not keep the suspense: It is not sustainable. But if it isn’t, what is the end game? Without further ado…

Relevant prices involved in the manipulation

From the second article, we know that central banks “…hold gold as part of their assets. However, they can swap their gold holdings for liquidity, for US dollars. This swap is a mere exchange and is shown as step 1, in the graph. The official explanation is that such swaps would have temporary liquidity management purposes, because they remove US dollars from the market (i.e. from the Bullion banks).  At a later date, not shown in the graph, the Bullion banks should return the gold to the central banks, and receive US dollars back (including an interest). For this reason, because the swap contract implies the return of the gold at a later stage, central banks are allowed to continue showing the gold they swapped in their balance sheets, as an asset…”  The graph is reproduced below:

 

Note: Since my last article, Zerohedge raised the possibility that a bullion bank may have its vault adjacent to another one owned by a central bank. In such particular case, the graph above should be revised as follows:

Humor aside and returning to our first graph, we can see that the swap obtains liquidity in exchange of collateral. Any profit maximizing agent would weigh placing gold as collateral for cash versus the cost of raising funds in the unsecured market. After all, anyone long gold could sell it, obtain the cash and buy it later, with a gold forward contract. Therefore, the liquidity cost facing (in this example) a central bank seeking to monetize its gold holdings, without selling, is expressed:

Cost of liquidity to a central bank = Min (gold swap rate, gold forward rate)

The gold forward rate is published by the London Bullion Market Association as the Gold Forward Offered Rate (GOFO). This rate represents the difference, in annual percentage terms, between the cash price and forward price of gold. Of course, the expression above implies that the central bank maximizes profit (i.e. minimizes cost). Just like a central bank does when it purchases bankrupt sovereign debt, to stabilize the liquidity in the system… (Temporarily, obviously).

On the other side of the swap, the Bullion Bank that receives gold as collateral must consider the transaction vis-à-vis providing liquidity in the unsecured US dollar market. The price for the latter market is Libor (London Inter-bank Offered rate), which is not really a price (because it doesn’t in itself clear anything), but a benchmark (The proof of this statement is simple: If Libor was indeed a price, the aggregate sum of the credit risk –as quoted in the credit default swaps market- of the panel banks that determine Libor should approximate zero. However, this sum is a positive number and far from zero). Indeed, the collateralized (with gold) lending should not be compared with lending in the unsecured US dollar market. Here, we have gold as collateral, which at the same time has storage and insurance costs. The benefit for a Bullion Bank for entering a gold swap is therefore expressed:

Benefit of gold swap = Max (gold swap rate, Libor)

When the swap occurs, both the central bank and the Bullion Bank agree on a price, the gold swap rate. Therefore:

Min (gold swap rate, gold forward rate) = gold swap rate = Max (gold swap rate, Libor)

Therefore, for the transaction to take place:    Gold forward rate > gold swap rate > Libor

This implies that the GOFO should approximate Libor. Unlike what mainstream economics tells us, exchange does not take place at indifference points along so-called utility curves. The Bullion Bank will either lend in the unsecured US dollar market or through a swap. Choice will happen and will have a cost. Therefore, if it lends via swaps, it has to be more profitable than earning Libor. The question is….what makes collateralized lending more profitable?

The answer is simple: the Bullion Bank not only earns the gold swap rate, but also a gold interest rate, as it uses the gold it receives to make gold loans. Hence, there is an extra benefit in swapping cash for gold, as the gold is loaned and earns a spread. As in the case of fiat money, where cash held by banks is used to expand credit, gold held by bullion banks is used to expand fiat gold:

The gold interest rate earned on fiat gold is commonly referred as the gold “lease” rate. This implies that the gold loan is not a loan, but a lease. The terminology is not coincidental. It allows the “leased” gold to be carried on the central banks’ books, as if the bullion was still in the vault. But this may certainly not be the case, because while I show gold in the asset side of the aggregate balance sheet of bullion bankS , this will not necessarily be the case at an individual level. For instance, let’s assume that the gold is loaned by what I will call Western bullion banks, but it ends up deposited in Eastern bullion banks. The aggregate position of the Bullion banks can be now shown as below:

At this time, it is important to understand the difference between gold swaps and gold loans. The graph below should help visualize it:

 

As can be seen, in a swap, the party that facilitates the bullion receives cash upfront. That cash is absent in a loan. This may be a reason for central banks to prefer swaps over loans: The swaps can become a liquidity management tool. They can be used for sterilization. As long as the gold swapped does not end up being sold in the spot market, gold swaps should be neutral to the price of gold.

From the perspective of a bullion bank, the gold loan leaves it “short bullion” vis-à-vis the gold swap obligation entered into with central banks. To hedge this risk, the bullion bank can use the gold swap rate received from the central bank to buy gold on a forward basis:

For the bullion bank to profit from a gold loan without the risk of being short bullion:

 (Gold swap rate – Gold forward rate) + Gold loan spread  > 0

In practice, Bullion banks quote these loans as: Cost of funds + x bps, where the cost of funds is defined as (Libor – Gold forward rate), for the applicable tenor (i.e. 3 months). This cost of funds is what is popularly called the Gold lease rate.

As bullion banks seek to hedge their gold loan counterparty risk, their demand for gold on a forward basis should raise the gold forward rate to the point where it is no longer profitable to expand the credit multiplier on fiat gold. That point can be expressed below as:

(Gold loan spread + Gold swap rate) < Gold forward rate

The pressure on the futures market for gold should therefore be the stabilizing mechanism that limits the expansion of fiat gold. However, this is only so under a static perspective. The dynamics of the process also involves gold miners. If, for instance, due to the expansion of fiat gold, the spot price of gold fell significantly, affecting the margins of miners, we could see consolidation in the industry via leveraged mergers in the current context of ultra-low interest rates. In this case, the same banks that led junior miners to become insolvent as they drove the price of gold down could be now selling their investment banking services to merge them with bigger players. In the process, the banks would demand that the new companies hedge their production, against further future gold price declines. This supply of future gold could offset the initial demand of the bullion banks, leaving room for a further expansion of gold loans…longer than most would believe.

As I wrote above, the collateralized lending rate (gold swap rate) should not be directly compared with the unsecured lending Libo rate. However, if a bullion bank loans gold and at the same time hedges with a gold forward contract, the resulting position can be comparable with unsecured lending.

If the gold lease rate is negative, it is expensive -ceteris paribus- to hedge the short bullion position, and the incentive to expand fiat gold decreases. This is supportive of the spot price of gold. If the gold lease rate is positive, it is relatively cheap to hedge the short bullion position and to continue expanding fiat gold. This is negative for gold. When fiat gold expands, we are likely to see a simultaneous bid for gold on a forward basis, to hedge. This should steepen the gold term curve, raising the gold forward rate.  When fiat gold contracts relative to bullion, the gold forward rate should fall, flattening the term curve. If spot gold is more expensive than forward gold, in other words, if there is a bid for storage of gold: Gold enters backwardation. In backwardation, the term structure is that of money. There is an inter-temporal rate that discounts future vs. present purchasing power.

Why we can say that this is manipulation

At this point, we must ask ourselves what is wrong with all this. After all, why should the morphing of gold reserves into fiat gold (via gold loans) be called a manipulation? There is nothing different between the creation of fiat gold out of bullion and the creation of US dollars out US Treasuries.

The answer is simple: There should be nothing wrong with it, if it was not hidden. Let me explain myself: If the central banks did not show the bullion swapped as gold in their possession and if the bullion banks showed the reserve ratio of fiat gold-to-bullion, just like banks do with fiat money, this could not be called a manipulation. Even with consistent sell offs at 8:20am ET or 4am ET, we would still not be able to call this a manipulation (I challenge readers to do their own research and find out what the credit multiplier of fiat gold and the equity ratio of the bullion banks are).

How would the market react therefore if there was full disclosure? Physical gold would trade at a premium. As an example, at the verge of the collapse of the currency board in Argentina, the premium for holding USD bills under the mattress vs. USD in the bank (i.e. paper USD), was expressed in terms of an opportunity cost: Banks were offering 20% per annum to retain USD deposits in savings accounts! In other words, those holding to their USD under the mattress, were foregoing a 20% return rate, for not taking risks….Now, let me ask you this: Do you see gold ETFs paying a dividend? There you go!

Finally, if there was full disclosure, gold would have to enter into backwardation, which is exactly what mainstream economics seeks to discourage, because the backwardation would once and for all bring to light the fact that gold is money.

 

The systemic risk of the manipulation: A flow analysis

The manipulation is also not without risk. The graphs below should illustrate this point:

The graphs above show the flows involved in the manipulation and the positions taken by the players. At inception of the conversion of bullion into fiat gold, the central bank assumes a short bullion/long cash position. The Bullion bank enters into a short bullion/long gold futures position, partly or fully financed via Treasuries repoed with money market funds, to cover the swap with the central bank as well as the margin for its long futures position. The gold borrower that sells the gold in the spot market to fund the purchase of asset y is therefore short bullion/long asset y. There are three main risks to this scheme that give the manipulation a systemic dimension. The systemic implication is tangible and should not be ignored, because we have proof of its actual costs. A clear example was the loss that UK taxpayers suffered when Mr. Gordon Brown, as Chancellor of the Exchequer, sold 400 metric tons belonging to the UK government. The sale was on purpose pre-announced, driving the price of gold down, to bail out those who had been profiting from the manipulation. Member of Parliament Nigel Farage had something to say about this:

Is this ever going to end?

The first graph above shows three events/risks that would crush the manipulation, possibly unleashing a systemic crisis, which should be enough ground to forbid the manipulation altogether. I will then proceed to elaborate on them and seek to reach a conclusion as to which one of them is the most likely to occur.

Event 1: Repudiation of US Treasuries

Description: This is a risk to the money market funds that are long US Treasuries through repurchase agreements. The repurchase agreements provide cash to the bullion banks who use it to either swap for gold or establish margins for their long gold futures position. In our example above and to keep things simple, I assumed that the gold borrower does not use leverage. This would be unusual and it is to be expected that the counterparties to the bullion banks also use leverage from repoeing US Treasuries. If there was a sell off, a repudiation of US Treasuries, bullion banks and their counterparties would have to unwind their positions and rush to purchase back the bullion they sold multiple times.

What could trigger it?: The repudiation of US Treasuries could be triggered by a ratings downgrade, or an outright sell off by the market, forcing the Fed to acknowledge their role as the only buyer regardless of the unemployment rate, caused by political instability in the US.

Mitigants: The current degree of financial repression would rise exponentially. Already Standard & Poors is under pressure and Egan Jones was banned from rating US Treasuries. Margin requirements could be lowered, shorting of US Treasuries could be forbidden and ultimately, the Fed could intervene bailing out the money market funds, as I explained before.

Likelihood: This event is unlikely to be triggered in the near term.

Event 2: Rush for delivery of physical gold

Description: This is a risk to all those who are short bullion. As the expansion of fiat vs. physical gold grows, the risk to a rush for delivery rises. In this case, gold futures would trade at a discount vs. bullion. Those short bullion could quickly face insolvency causing an exponential rise in counterparty risk within the market and eventually the crash of the clearinghouse. The clearinghouse would then have to be bailed out by a central bank(s) and bullion could be outlawed and confiscated.

What could trigger it?: As I write, there is already a rotation going on, from paper gold to bullion. I may even venture to suggest that stop losses are increasingly absent, as the manipulation renders price signals irrelevant. During the first week of March, the $1,570/oz level was broken twice on bearish news, only to find  minimal sensitivity, forcing the shorts to cover. This behaviour is typical from segmented, broken markets, where price is no longer the relevant signal and volume becomes the guideline. Having said this, an event that could trigger the rush for delivery could be an “accident”, just like the one the world witnessed in 1972, when Russia announced it had purchased 440 million bushels of wheat. The purchase surpassed the total U.S. commercial wheat exports for that year. In similar fashion, we could see the disclosure of an upwards revision in the gold reserves held by a central bank in the East that would seriously challenge the integrity of the reports issued by central banks in the West with respect to their bullion holdings.

Mitigant: In 1972, the world was divided. Today, all central banks are on the same expansionary program and the systemic impact of a rush for delivery in gold would likely affect all currency zones. I would therefore not expect emerging central banks to report their actual gold purchases and holdings. They have more to benefit from keeping these in secret, profiting from the cheap prices the manipulation causes.

Likelihood: This event is unlikely to be triggered in the near term.

Event 3: Liquidity crunch

Description: This is a widespread, macro risk. Its scope surpasses that of the gold market. For this reason, mitigating it is impossible, when all central banks are engaged in the monetization of sovereign debts. This is the risk of having malinvestments surface their ugly heads and causing a wave of defaults. Central banks would once more, but with a very publicly low marginal efficiency, flood markets with liquidity. And this liquidity would quickly find its way into bullion, triggering the events no.1 and 2 above.

What could trigger it?: In my view, political and social unrest in Europe would cause a selloff in European risk, compromising the balance sheet of the Fed, which is coupled indirectly via USD swaps and directly via funding of European banks. These banks also raise funds from US money market funds.

Mitigant: The mitigant here is only political. It depends on how longer the status quo can force the Euro zone to live under high unemployment, taxes and austerity.

Likelihood: I see this event as the most likely to put an end to the manipulation, although I do not see it occurring in the near term.

Is Eric Sprott’s prophecy valid?

In recent interviews, Mr. Sprott has made the point that as the manipulation comes to end, the premium on physical precious metals vs. fiat precious metals will be as high as the leverage (i.e. credit multiplier) that suppressed it.

The manipulation just described somehow resembles the suppression of the value of the US dollar in Argentina during the convertibility of the peso, after the 1994 Mexican peso crisis. Officially, the Argentine peso was convertible to US dollars at a 1:1 ratio. But the credit multiplier for US dollar deposits was legally capped at 3x in March 1995 (this was a simple calculation, because Argentina lacks any sophisticated shadow banking system). As it became evident that this situation was unsustainable and the public began a run on US dollar deposits, US dollar bills (under the mattress) began to trade at a premium against US dollars in bank accounts, as I explained above. First, limits on withdrawals were established at the end of 2001 and eventually a bank holiday was declared. When the holiday was lifted and the system imploded, the US dollar overshot to 3.80 pesos, but after a few months, it settled back to around $3.00…exactly the ratio implied by the credit multiplier that caused the crash. This simple and real example tells me that Eric Sprott’s claim is spot on. The chart below (source: Bloomberg) on the USD in terms of ARG peso, makes my point very clear:

However, I expect a financial repression like never seen before unleashed before the prophecy finally becomes reality. Something to keep in mind: The repression of the price of the USD in Argentina lasted seven years in a context with (a) no shadow banking system, (b) full disclosure of the credit multiplier and (c) a market price for the opportunity cost of holding USD bills under the mattress. Seven years, folks! This suggests two things: (1) It will take a period far longer than most are willing to accept until the day of reckoning comes, and (2) when that day comes, the crash will be far more formidable than anyone can imagine.

Conclusions

This extensive letter was the third of a series on the manipulation of the price of gold. I am confident that through them, I established the following conclusions:

-According to mainstream economics, the manipulation is a necessary policy tool, to achieve the global monetization of sovereign deficits. Without manipulation, inflation expectations would be shaped by the gold market, causing the fall of fiat money.

-The manipulation consists in inventing a new fiat currency, fiat gold, with a credit multiplier.

-To hedge the manipulation, one can trade the expansion or contraction of the credit multiplier in gold

-The creation of fiat gold, per se, is not manipulation. The manipulation consists in keeping the credit multiplier undisclosed and misrepresenting reserves of bullion.

-The manipulation of gold engenders serious systemic risks that could eventually lead to the crash of a clearinghouse. The costs are tangible.

-The most likely event to put an end to the manipulation is a wave of corporate defaults.

-When the manipulation ends, the premium in physical gold vs. fiat gold will approximate the credit multiplier.

Martin Sibileau

Note: In a recent post published by Mr. Chris Powell on Gata.org on March 22, 2013, a few inferences on me are published that are false. I have no control on such inferences and was not contacted by Mr. Powell nor GATA with regards to any of my posts on this blog. Had I been contacted, I would have strongly denied such inferences, which I completely disavow.

First, I am not a high executive in a big investment firm, as Mr. Powell has portrayed me. I am an employee with very limited responsibilities, completely outside the precious metals markets or mining.

Second, I do not work in investments nor invest for anyone or work in the area of investment banking or trading and, with respect to this particular article, I do not have any previous working experience in or inside knowledge of the precious metals markets or mining. This should be clear from reading the “About the contributor” tab in this blog.

Third, as the disclaimer on this blog duly notes, the comments expressed in this website and daily letters are my own personal opinions only and do not necessarily reflect the positions or opinions of my employer or its affiliates. I maintain this personal and independent blog outside my working hours and absolutely all of my posts are based on nothing else but public information and my own analysis/reading/interpretation of that information.

In particular, I completely disavow the inferences made by Mr. Powell’s post with respect to bullion banks and the mining industry. They are 100% his responsibility. The paragraph on the involvement of miners in the futures market of my post is nothing else than my personal interpretation of articles in the public domain on the subject and only seeks to explain a certain dynamics affecting the gold forward rate. As my disclaimer also notes, the information contained herein is not necessarily complete and its accuracy is not guaranteed. In other words, I can be wrong.

Unfortunately, my name and comments have been subject to incorrect inferences. I am not responsible for them.

Martin Sibileau

Please, see important disclaimer/ note at the end of this article:

Please, click here to read this article in pdf format: February 26 2013

This is the second of three articles I am posting on the suppression of gold. In the first article I showed that, under mainstream economic theory, the suppression of the gold market is not a conspiracy theory, but a logical necessity, a logical outcome. This second article will show how that suppression takes place. Those familiar with the gold market will likely find nothing new. The third article will examine the implications of this suppression and support the claim of the gold bugs, namely that physical gold will trade at a premium over fiat gold or gold paper is also not a conspiracy theory, but the logical outcome of the current paradigm.

How they do it: The concept

The popular notion, which central bankers would love to destroy, is that gold is a good hedge against inflation. In its simplest form, gold cannot be printed and, as its supply remains anchored, its price should spike if the supply of fiat money increases. The implicit math behind can be represented as follows:

Given a constant demand for money…

 

The equation above shows the price of gold, in terms of a fiat currency (in this case, the US dollar) as a function of the relative supplies of gold and the US dollar. In the case of a fiat currency, its supply is the product of two factors: the monetary base created by the respective central bank and the corresponding credit multiplier. This multiplier reflects every single mean by which the original base is expanded, through the banking system and the shadow banking system.

If the equation above was indeed representative of the state of affairs we’re in, there would be no room for manipulation. The supply of gold, in terms of ounces available, could be perhaps capped or confiscated, but not expanded. The price of gold, therefore, could not be suppressed.

Now that we know what cannot be, let’s understand what really is happening. To suppress the price of gold. central bankers, simply, have invented a new currency: Fiat gold.  The math involved in it now is:

Given a constant demand for money…

As you can see from the second equation above, the genius of central bankers was not to forbid gold but to morph it into another fiat currency, by adding a credit multiplier to it. With this, it only takes to proportionally expand this credit multiplier faster than the numerator (of the equation) and the price of gold will fall regardless of fundamentals. If they want to go one step further and signal to the public that they can do this with complete impunity and for as long as they please, they then proceed to expand the credit multiplier predictably at specific times of the day (i.e. 8:20am ET).

How they do it: The details

Below, I will describe how the supply of this new currency, fiat gold, is expanded. The motivation for this expansion was already explained in the previous article. Below, I present the steps included in the expansion of the supply of fiat gold. In the next article, I will elaborate on the graph below, addressing its implications and consequences. But today, let’s just look at the mechanics:

The above graph shows the aggregate balance sheets of the central banks, bullion banks and the gold market. Bullion banks handle transactions in precious metals and, in this case, in gold. As you can see, central banks hold gold as part of their assets. However, they can swap their gold holdings for liquidity, for US dollars. This swap is a mere exchange and is shown as step 1, in the graph. The official explanation is that such swaps would have temporary liquidity management purposes, because they remove US dollars from the market (i.e. from the Bullion banks).  At a later date, not shown in the graph, the Bullion banks should return the gold to the central banks, and receive US dollars back (including an interest). For this reason, because the swap contract implies the return of the gold at a later stage, central banks are allowed to continue showing the gold they swapped in their balance sheets, as an asset.

Once the physical gold is in the hands (i.e. balance sheet) of the Bullion banks, these banks can create loans against it, supplying the market with fiat gold. This is shown in step 2. Gold is debited and Gold loans are credited. The ultimate amount of gold loans outstanding is obviously a factor of the credit multiplier in fiat gold. The higher the multiplier, the higher the supply of fiat gold in the market and the pressure on the price to come down.

The anxiety around this issue is noticeable and the big questions are: How far can central banks go with this manipulation? How long can it last? Is there a mechanism by which the market should revert to fundamentals? I will devote the next letter to the last question. With respect to the first ones, all I can say is that central banks can go very, very far with the manipulation and can last longer than you or I are willing to believe. Why? Because unlike the case of other currencies and their respective credit multipliers, in fiat gold, the players that demand gold loans are also the ones who transact in gold (i.e. Bullion banks) and dominate the repo market to provide funding (to those ultimately speculating with gold). They are all the same and only a handful. They play a cooperative game among themselves and with the central banks. The public that holds physical gold or the central banks that accumulate physical gold but do not enter into swaps with the Bullion banks cannot force a contraction in the credit multiplier. By their actions (i.e. hoarding of physical gold), all they can do is to force the rest of the central banks and Bullion banks involved to take a higher risk in the expansion of the multiplier. But they cannot force a rush for delivery. They are, by definition, outside of the system.

How can we protect ourselves from the manipulation?

One way to protect ourselves from the manipulation described above is to simply trade the expansion of the credit multiplier for fiat gold. At this point, I remind the reader to read my disclaimer. (My comments are not intended to provide personal investment advice and they do not take into account the specific investment objectives, financial situation and the particular needs of any specific person).

If the supply of fiat gold is a factor of the monetary base in fiat gold and its credit multiplier, one can think of proxies for these factors. In my view, the monetary base is represented not only by the stock of physical gold outstanding, but also by the stock that is to be mined: By the gold miners, collectively. Fiat gold, on the other hand is represented by either futures or gold certificates.

When the manipulation succeeds, the credit multiplier expands. In this case, if I am correct, it should be profitable to be long the promise to deliver gold and short the monetary base of fiat gold. When the manipulation is not successful or a rush for delivery is triggered, the credit multiplier contracts. Here, if I am correct again, it should be profitable to be short the promise to deliver gold and to be long the monetary base of fiat gold. There are many ways to express this trading thesis, but I’d rather leave these speculations to the reader.

 

Martin Sibileau

Note: In a recent post published by Mr. Chris Powell on Gata.org on March 22, 2013, a few inferences on me are published that are false. I have no control on such inferences and was not contacted by Mr. Powell nor GATA with regards to any of my posts on this blog. Had I been contacted, I would have strongly denied such inferences, which I completely disavow.

First, I am not a high executive in a big investment firm, as Mr. Powell has portrayed me. I am an employee with very limited responsibilities, completely outside the precious metals markets or mining.

Second, I do not work in investments nor invest for anyone or work in the area of investment banking or trading and, with respect to this particular article, I do not have any previous working experience or inside knowledge of the precious metals markets or mining. This should be clear from reading the “About the contributor” tab in this blog.

Third, as the disclaimer on this blog duly notes, the comments expressed in this website and daily letters are my own personal opinions only and do not necessarily reflect the positions or opinions of my employer or its affiliates. I maintain this personal and independent blog outside my working hours and absolutely all of my posts are based on nothing else but public information and my own analysis/reading/interpretation of that information.

In particular, I completely disavow the inferences made by Mr. Powell’s post with respect to bullion banks and the mining industry. They are 100% his responsibility. The paragraph on the involvement of miners in the futures market of my (third) post on this topic is nothing else than my personal interpretation of articles in the public domain on the subject and only seeks to explain a certain dynamics affecting the gold forward rate. As my disclaimer also notes, the information contained herein is not necessarily complete and its accuracy is not guaranteed. In other words, I can be wrong.

Unfortunately, my name and comments have been subject to incorrect inferences. I am not responsible for them.