Brent Prices Fall After North Korean Nuclear Test

Brent prices were down on Monday morning after investors shied away from crude oil markets and instead turned to safer-haven gold futures after North Korea conducted its sixth and most powerful nuclear test over the weekend. At 09:40 am CST on Monday, Brent Crude was down 0.23 percent at US$52.63. Meanwhile, spot gold prices today touched a one-year high as investors flocked to safer asset classes. WTI Crude, the U.S. benchmark, was holding steady, up 0.38 percent at US$47.47. Trading in crude futures today is expected to be thin due to the Labor…

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Brent Prices Fall After North Korean Nuclear Test

Brent prices were down on Monday morning after investors shied away from crude oil markets and instead turned to safer-haven gold futures after North Korea conducted its sixth and most powerful nuclear test over the weekend. At 09:40 am CST on Monday, Brent Crude was down 0.23 percent at US$52.63. Meanwhile, spot gold prices today touched a one-year high as investors flocked to safer asset classes. WTI Crude, the U.S. benchmark, was holding steady, up 0.38 percent at US$47.47. Trading in crude futures today is expected to be thin due to the Labor…

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Goldman Sachs: Oil Majors See Upside At $50 Oil

Although oil prices are now half what they used to be three years ago, Big Oil is better positioned now than it was when oil prices were sky high, Michele Della Vigna, co-head of European equity research at Goldman Sachs, told CNBC in an interview on Monday. In the dizzy spending days between 2010 and 2014, when oil prices were above US$100, those high prices were actually “dreadful time” for the international oil majors, because everyone was eating the lunch, and Big Oil’s competitive positioning was destroyed, according to Della…

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Stockman Slams The Donald’s Seinfeld Tax Plan: “It’s A Big Show About Nothing”

Authored by David Stockman via Daily Reckoning blog,
Someone should remind the Donald that he actually is President and that it’s high time he accomplished something. Anything.
Back on April 21st, for example, he promised that a core feature of h…

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Israel PM admits he spoke to newspaper before 2013 poll

Israeli Prime Minister Benjamin Netanyahu has acknowledged that he spoke by phone 15 times — within a 19-day period — to a prominent Hebrew-language daily in the run-up to the country’s 2013 general election. Israeli media, including the Jerusalem Post, reported on Monday that Netanyahu had disclosed his frequent calls with Israel Hayom (Israel Today) Editor Amos Regev in statements submitted to Israel’s Supreme Court on Sunday. According to the Jerusalem Post, the calls were made in the weeks running up to Israel’s 2013 general election in which Netanyahu clinched the premiership. On Thursday, Netanyahu told the court that he had spoken roughly 200 times with Regev — and about 100 times with the paper’s U.S.-based owner, Sheldon Adelson — […]

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Precious Metals Flash-Crash After Silver Surged To 4-Month Highs, Gold Nears Election-Day Spike Highs

While stocks have been limping higher since around 2am ET (following headlines on an imminent ICBM launch) they remain lower from Friday’s close:

But precious metals the biggest gainers of post-North Korean “hydrogen bomb” testing safe haven flows.

Silver broke above resistance at early June highs to test $18 and the highest levels since April 25th.

But that was clearly not acceptable to someone:

At 0451ET, someone decided it would be an opportune time to dump over a quarter of a billion dollars notional of gold into the futures market…

Taking out the Asia opening low stops. For now the gains in PMs are holding.

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The Forking Paradise, Gold & Silver Report 3 Sep 2017

A month ago, we wrote about the bitcoin fork. We described the fork:

Picture a bank, the old-fashioned kind. Call it Acme (sorry, we watched too much Coyote and Road Runner growing up). A group of disgruntled employees leave. They take a copy of the book of accounts. They set up a new bank across the street, Wile E Bank. To win customers, they say if you had an account at Acme Bank, you now have an account at Wile, with the same balance!

This fork came about from a disagreement among the bitcoin miners, those who control the blockchain and hence the currency. The equivalent of the disgruntled Acme Bank group left to form bitcoin cash, the equivalent of Wile E. Bank. However, it has often been said that necessity is the mother of invention. Applied to bitcoin, that means that what happened due to irreconcilable differences in this case, could also occur deliberately later.

Why would someone do this deliberately? Well, as of this writing (Saturday afternoon), bitcoin cash is trading for $568.28. This copy of the original bank ledger is worth over fahv hunnert Benjahminns! Actually, not the ledger. Each record in the ledger. The ledger as a whole is worth $9.4 billion.

For anyone—or a cartel of someones—who can fork bitcoin, there are now 9.4 billion reasons to do so. Think about that. Take as long as you need.

Now, we don’t want to disparage anyone. We are absolutely certain that everyone who is speculating to get rich in bitcoin will turn away from forking. It just doesn’t feel right, and it couldn’t possibly be moral to create forks on purpose, to get richer quicker.

But if someone did wish to do it, there is a powerful incentive. Economics tells us that if a powerful incentive exists to do something, then someone will do it. For example, if the government subsidizes borrowers by pushing down the interest rate then there will be all sorts of borrowing that would otherwise not occur (to finance all sorts of activities that would otherwise make no sense). Or, if it subsidizes insurance for people who build in flood plains, then many people will build in flood plains.

We now live in a world where altcoins are proliferating. There is a crypto currency named for a set of Internet memes called Doge. There is PotCoin for the marijuana industry, and even PepeCash and PutinCoin. There is a coin named for the most popular four-letter word. By this standard, it makes sense to fork bitcoin as many times as one can. To fork and fork and fork until the marginal ForkCoin has value lower than the cost of forking.

Snark aside, and in all seriousness, the point of our article a month ago is that the fork shows the contradiction in a ledger of liabilities unbacked by assets. By dispensing with the need for assets, the liabilities can proliferate—fork—and there can be any number of alt liabilities too.

Our point in this article is that this contradiction creates a powerful perverse incentive, that someone sooner or later will take up. We prefer the term “perverse incentive” to “unintended consequence”, because it puts the focus where it belongs. We look at what is profitable for someone to do, rather than the real or alleged intentions of the designers. In some cases, the intention is obviously evil. For example, Obamacare was designed to destroy the insurers and drive America towards socialized medicine. In other cases, perhaps in bitcoin, the designer did not foresee much less intend the outcome.

However, here we are. Both the possibility to fork and the incentive are now obvious. We would not bet against it, as we would not bet against Boromir putting on the One Ring. In a Middle Earth minute.

We have not much focused on price, other than how rising price makes bitcoin unsuitable as money or how bitcoin does not have a firm bid. We do not subscribe to the view that bad means the price must go lower soon. However, let’s look at price of an asset in a bubble starting with the dollar.

The dollar, it is often and loudly asserted, has value only because of faith. As soon as the faith is pricked, the air will rush out of the bubble. This partly explains why the gold bugs latch on to every story about gold repatriation in Germany or Treasury Secretary Steve Mnuchin visiting Fork Knox. Mnuchin said, “I assume the gold is still there,” and thus began quite a tempest in a tea pot.

The belief is that as soon as the one-awful-fact-they-don’t-want-you-to-know becomes known, then the dollar will collapse. And gold will go to $65,000 (price measured in collapsed dollars). It’s a quest for the holy grail. Now, we enjoy tilting at windmills as much as Don Quixote, but this view is wrong. The dollar does not have value because of some fragile, collective faith.

The dollar has value because of the struggles of the debtors. What are you willing to sell, in order to avoid foreclosure on your house, repossession of your car, or bankruptcy of your business? Your labor and the products of your effort. As much as you need to sell, in order to service your debts and avoid default.

However, there is no real borrowing in bitcoin. What holds up the value of bitcoin?

There is a risk that a series of forks could prick this bubble of faith.


There were big moves in the metals markets this week. The price of gold was up $31 and that of silver $0.56. The price of gold hasn’t been this high in just about a year, which is another way of looking at the one-year low price of the dollar. From its high over 27.5mg gold in mid-December 2016, the dollar has dropped 11% to its current 23.5mg.

Will the dollar fall further? In the short term, anything is possible. Once speculators smell blood in the water (i.e. a strong looking chart pattern), they may enter bigger trades with leverage. We will, of course, see that as a rising basis which is a contrarian signal. In the longer term, prices cannot go up too far or remain high if there is not a renewed demand to hold gold metal.

One possible driver of this is portfolio rebalancing by those who bought a small allocation of bitcoin or Etherium which is now not-small. Will these folks sell their cryptocurrencies, which are anti-dollar plays, to buy more dollars? Or will some of them buy real money? This remains to be seen.

As always, we are interested in the fundamentals of supply and demand as measured by the basis. We will show intraday basis charts this week as there are some interesting features.

But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio moved down.

In this graph, we show both bid and offer prices for the gold-silver ratio. If you were to sell gold on the bid and buy silver at the ask, that is the lower bid price. Conversely, if you sold silver on the bid and bought gold at the offer, that is the higher offer price.

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph (Dec contract), this time showing intraday resolution for the full week (here is the regular gold basis chart).

We have posted many graphs showing basis correlating with price. That is, as price rises so does basis. Basis is the spread between futures and spot. A rising basis means futures are rising faster than spot, which occurs if the buying pressure is occurring in the futures market. If the buyers are mostly speculators.

Something should immediately leap out at you on this graph. This relationship broke down Thursday afternoon (GMT). First there is a minor sell off seen in the price move from about $1,307 to $1,305. The basis drops from about 1.17% to 1.12%. The basis begins to rise with rising price after that, but it trails. It recovers the 1.17% level but only when price is about $1,317—ten bucks higher. Then as price keeps rising, basis is sideways until midnight. Basis makes one more rally approaching 7am (GMT), then falls back sharply as price continues to rise. Especially late in the day. Even if we ignore the last part below 1.11% as liquidity is dropping with the rest of the world offline and only whatever trading volume remains in the US Friday afternoon before a major holiday weekend (Monday is Labor Day), we still see a falling basis with rising price.

Demand for gold metal has picked up, even at this higher relative price. One of gold’s unique properties is that demand can rise as price rises, without any particular limit (even if it hasn’t happened much in recent years).

To put this into perspective, we would not characterize the current market state as a gold shortage. Every contract is in contango (Sep basis is over 0.5%). The continuous gold basis has been in a rising trend for two months. Gold is not exactly scarce, nor facing massive demand for physical metal and shortage. As our old buddy Aragorn would say, “today is not that day.”

However, the basis move is notable in contrast to the price move. The rise in basis has not been much, considering how much the price has risen—about $120 in two months. Now the December contract, which matures in under 120 days, has a basis below that of 3-month LIBOR (about 1.3%).

The calculated Monetary Metals gold fundamental price was up $25, to $1,355.

Now let’s look at silver, with a similar graph of the week’s action (here is the regular silver basis chart).

At the risk of turning these charts into Rorschach Tests, this one does not look the same to us at all. The silver basis tracks the silver price, though a skew occurred on Wednesday and widened on Thursday. The movement of both traces were a close fit on Thu and Fri. Note the spike down in the basis at the end of the day on Friday (as in gold, though gold had been falling all during the London day through the US day).

Our calculated Monetary Metals silver fundamental price increased $0.46. And, though our calculated Monetary Metals gold:silver ratio fundamental price has dropped a bit, it was rising the last three days of the week.

 

© 2017 Monetary Metals

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Ethereum, Bitcoin Crash After China Declares Initial Coin Offerings Illegal

Ethereum and bitcoin are crashing this morning, after China confirmed its recent threat of an ICO crackdown (reported here last Monday) when the central bank said on Monday that initial coin offerings are illegal and disrupt financial markets, according to statement on China’s central bank website. The PBOC also asked all related fundraising activity to be halted immediately, issuing the strongest regulatory challenge so far to the burgeoning market for digital token sales.

The crackdown was announced in a statement on the PBOC’s website in which the central bank said that it had completed investigations into ICOs, and will strictly punish offerings in the future while penalizing legal violations in ones already completed. The regulator said that organizations or individuals that completed initial coin offerings should return the money raised, in move “to protect investors’ rights and properly handle risks,” though it didn’t specify how the money would be paid back to investors.

Taking the recent SEC crackdown on Initial Coin Offerings several steps further, the PBOC also said digital token financing and trading platforms are prohibited from doing conversions of coins with fiat currencies. Digital tokens can’t be used as currency on the market and banks are forbidden from offering services to initial coin offerings, and are also also banned from offering pricing and information services on coins. Most importantly was the PBOC’s determination that “digital token can’t be used as currency on the market” and its warning that “China will strictly punish over sustained offerings and law violations in completed ones.”

The central bank’s Monday directive made no mention of cryptocurrencies such as ether or bitcoin. Bitcoin tumbled over 8%, the most since July on a closing basis, to $4,480. Ethereum was down more than 11% Monday, to just above $310, after trading nearly $400 last week.

“This is somewhat in step with, maybe not to the same extent, what we’re starting to see in other jurisdictions – the short story is we all know regulations are coming,” Jehan Chu, managing partner at Kenetic Capital in Hong Kong, which invests in and advises on token sales, told Bloomberg. “China, due to its size and as one of the most speculative IPO markets, needed to take a firmer action.”

As described previously, ICOs are controversial digital token sales that have seen unchecked growth over the past year, raising $1.6 billion and surpassed traditional venture capital raising pathways. They have been deemed a threat to China’s financial market stability as authorities struggle to tame financing channels that sprawl beyond the traditional banking system. Widely seen as a way to sidestep venture capital funds and investment banks, they have also increasingly captured the attention of central banks that see in the fledgling trend a threat to their reign.

While hardly the world’s biggest coin offering market, China accounts for about a quarter of the blockchain based capital raising activity YTD: there were at least 43 ICO platforms in China as of July 18, according to a report by the National Committee of Experts on the Internet Financial Security Technology. Sixty-five ICO projects had been completed, the committee said, raising 2.6 billion yuan ($398 million).

Incidentally, just as we speculated in late July, when the SEC announced its own crackdown on initial coin offerings, a move we deemed would be beneficial in the long run for weeding out the various criminal and ponzi schemes that have proliferated in the unregulated market, so today’s move by China is seen by some as favorable for blockchain dynamics:

“This is a positive move given the rapid proliferation of low quality and possibly fraudulent coin sales promising the moon,” said Emad Mostaque, London-based co-chief investment officer at Capricorn Fund Managers Ltd. “There is tremendous value in the model but we need to see more separation of high quality, ethical offerings versus those seeking to circumvent securities law for a quick buck.”

Indeed, the SEC signaled greater scrutiny of the sector when it warned that ICOs may be considered securities, though it stopped short of suggesting a broader clampdown. The regulator reaffirmed its focus on protecting investors, however, and said issuers must register the deals with the government unless they have a valid excuse. The vast amount of money amassed in a short span of time has also attracted cyber criminals, with an estimated 10 percent of money intended for ICOs looted away by scams such as phishing this year, according to Chainalysis, a New York-based firm that analyzes transactions and provides anti-money laundering software.

China will likely eventually allow token sales, according to Chu of Kenetic Capital, however only on approved platforms, and may even vet projects individually. “I think they will allow the sale of tokens in a format which they deem safe and more measured,” he said.

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