Separating the Signals from the Noise
Separating the Signals from the Noise by Claudio Grass
Before you listen to the podcast, I would like to provide some additional context and background to the discussion, that could offer a deeper understanding and further dimensions to the positions and arguments that we’ll elaborate on with Todd Horwitz.
Todd Horwitz is known as Bubba and is chief market strategist of BubbaTrading.com. He is a regular contributor on Fox, CNBC, BNN, Kitco, and Bloomberg. He also hosts his daily podcast ‘The Bubba Show.’ He is a 36-year member of the Chicago exchanges and was one of the original market makers in the SPX.
“The idea that human kind can shape the world according to wish is what I call the fatal conceit” – Friedrich August von Hayek
Some time ago, I read an interesting study entitled: “Who sets the price of gold? London or New York?”, written by Martin Hauptfleisch, Tālis J. Putniņš and Brian Lucey.
One of the most interesting findings was the following:
“A striking result of our analysis is that although the volume of gold traded in the UK OTC spot market is more than ten times higher than that of the US futures market (78.0% market share compared to 7.7%), the futures market tends to play a more important role in incorporating new information about the value of gold. This result highlights the importance of market structure and instrument type. Our results support the notion that the centralization and relatively transparency of the futures market contribute to its disproportionately large role in price discovery. It is also likely that the low transaction costs, inbuilt leverage and ability to avoid dealing with the underlying asset, make futures contracts an attractive option for those that trade gold as a financial asset, and such trades contribute disproportionately to price discovery.”
To me, this just confirms what I’ve observed though my experience in the gold industry, that consumers in the western world could easily live without physical gold. We have largely forgotten Gold and this is the main reason why we see such huge paper leverage today. In addition, this is only possible as long as the market players respect the unwritten rule to limit physical delivery to as little as possible. When you look at this issue from that perspective, you also understand why we had up to 500 paper claims at the Comex for every single ounce readily available for delivery in the past.
The authors of the paper also describe the current situation as follows:
“According to the Loco London Liquidity Survey (Murray, 2011), the daily turnover on the London gold spot market alone is in excess of $216 billion, which is comparable in value to US- Australian and US-Canadian dollar foreign exchange settlements (based on 2010 data in Bank for International Settlements, 2011), as well as the daily turnover of all stock exchanges in the world. The average daily dollar volume of the front futures contract over the same period is approximately $22 billion, illustrating the size disparity between our markets.”
As per London gold clearing statistics for 2016, the total trading volume in the London Over-the-Counter (OTC) gold market is estimated at the equivalent of 1.5 million tons of gold. The volume of 100oz gold futures on New York’s COMEX reached 57.5 million contracts during 2016, or 179,000 tons of gold. If we now take into consideration that only approximately 187,000 tons of gold have actually been mined up to today the paper scam is just gigantic.