Weekly Charts – Conspiracy and N+1

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N+1 is a mathematical construct that means there is always one more.  If you have 5 then you can get 6, if you have 11 then you can get 12 and so on.  Theories are the same way.  For every plausible (or implausible) theory, there will likely be another.  If there are 5 competing theories, there will likely emerge a 6th.  To vary this slightly, if you can construct one explanation for something and either you or someone else can construct yet another explanation, then yet still another explanation is possible – N+1. In time, the correct theory is usually revealed through observation, investigation or entropy.

Earlier this week, the blogosphere lit up with Grant Williams musing about Gold. Mr. Williams conspiracy (his words) makes for good reading and if you sell newsletters, that’s a good thing. But as I read the article I was a bit dumbfounded about the explanation because of what was not said about possible business scenarios.  For example, why was the gold being held by the US in the first place?  What was the business arrangement for it?  What does the legal framework around that arrangement entail? As someone who has had my lifetime fill of lawyers due to litigation (business), licensing deals and mergers and acquisitions,

I can assure you that there will be some very specific covenants around storage, insurance, leasing rights, payments, inspection, repatriation schedules and much, much more.  I mean those very smart Germans and the highly antagonistic Venezuelans didn’t put gold in the US based on a handshake and a few freindly words over drinks.  They put is there for a reason and that was never discussed. Equally plausible other explanations (N+1) exist for all the Mr. Williams’ comments. I suspect (but don’t actually know) that gold, being an unproductive asset (no dividends, no interest) was placed here to transact business to make it productive.  The US markets have leasing programs that do just that.  And they are good at it. 

Should that be the case, the people involved are businessmen who are in the business of doing business (making money).  So given that, they will also have repayment or repatriation schedules.  It’s the same with a mortgage or a loan that the holder uses to generate income.  The holder won’t let you clear it when you want because they are making money on it and it is part of their cash flow projections.  I have no idea why repatriation to Germany will take seven years but it may simply be the repatriation schedule based on the size of holdings and the extent of the leasing program. You will note that neither Germany nor the always-hostile Venezuela has cried foul.  It’s possible they are just operating according to the agreements put in place when the gold was placed with US holders.

If something was truly amiss, you could at least count on Venezuela to take the opportunity to embellish upon further US atrocities. As a side note, the idea of shipping a bunch of gold on leased 747’s is interesting but is far from cost effective.  I would rather sell it locally and buy it on the London Exchange.  Why pay to ship the stuff across the Atlantic (just an opinion)?

The JPM gold holdings are another point for N+1.  People who are involved with the business know what’s going on but for obvious security reasons, they are not about to tell anyone yet. The gold has not disappeared of course.  It is still somewhere because unlike consumable commodities like oil or wheat – both which are converted to another form giving off energy – every ounce of gold ever mined is still here on the planet (OK, except for that in space craft that won’t return to earth). Gold supply therefore continuously increases as it is mined. So what’s the deal with JPM?  I don’t know. 

They might be reducing inventory in preparation for new inventory from another customer, they may be moving it to a partner holder, or they might be getting out of the business of storage.  This last idea is actually more likely since this is exactly a point of discussion at the FED.  Indeed, the Senate Banking Committee is meeting this week to discuss eliminating commodity trading from registered banks.  JPM knows this and they might be reducing inventory in case of an adverse ruling (get out while the getting is still good) or they might be transferring it to a non-registered partner or they may have sold the business to someone else.  For business reasons they aren’t going to tell anyone what they are doing until it’s done.

I’ve ranted enough about this. My intention is not ot offend – just present a different point of view. I could be wrong on all the ideas I’ve presented. I don’t easily buy into conspiracies because it takes really smart people to pull of these grand designs and that is increasingly improbable the larger the group of actors become (and with gold, there are more eyeballs on it than just about anything else).  There are other explanations that are not so laden with innuendo and conspiracy.  

As I said, I don’t know what the real reason is for various circumstances around gold inventories and such. I don’t think any outsider knows – Mr Willimans included. Whatever the reason, money greases all wheels and I suspect it’s all about business arrangements and perhaps future policy but for legal, security and competitive reasons, the people who actually do know won’t be talking.

Happily, I don’t need to know – and I never will know the reasons because I don’t run in the appropriate circles.  I believe the market is pretty darn smart and I am not going to argue with it. The charts have been telling me all I need to know about gold for some time.  In that light, does the market have a problem with JPM’s declining gold storage? This would be the market of everyone, including insiders, holding JPM stock.  A quick look at the chart shows JPM trading at life-time highs so I guess the market is just fine with present arrangements.

The gold charts I’ve been showing are below.  We have a change in gold in that the short stop has been tripped. Triggering the stop doesn’t mean ‘go long’ as this isn’t a stop-and-reverse system.  It simply means that the after a long downdraft in gold, the risk of staying short is too high.  This is a calculated stop that starts far away when first tripped and then gets closer to price action as the trend matures.  The trend can reverse here, the market could go sideways for a bit or the trend could resume.  I don’t predict. We have seen the stop get tripped before only to have the trend resume.  The hollow HA Candle is encouraging as it is an early warning that the trend may be changing.

GC Weekly 19Jul13

The gold miners are still in a down trend but trading very close to the trailing stop. Given the action in gold, I would not be surprised to see the miners trip the short stops.  But I’ll wait and see of course.

GDX Weekly 19Jul13

Weekly GDXJ 19Jul13

The SPX chart is below.  You can read last week’s commentary as nothing much has changed.  The momentum has up-ticked a bit though.

SPX Weekly 19Jul13

Good Trading!

Dr. G