Correlation between Bonds and Gold

Just to be sure that I have this picture (and correlation) logged onto this blog, here is the famous Zero Hedge bonds Vs. gold chart.

Chart 1: Bonds Vs. Gold

And here is my updated version based on the charts GOLDAMGBD228NLBM and DGS10:

Chart 2: Bonds Vs. Gold

The decoupling of the two charts seriously went into overdrive from 2008 onwards. Guess what, that year marks the start of the QE programs to keep interest rates low. I wonder which one of the two charts will be the ultimate loser. (it won’t be gold because marginal cost of production is $1500/ounce)

The Marginal Cost of Gold Production

UBS recently put out a number for the cost of producing an extra ounce of gold. As you can see on chart 1, the cost has skyrocketed from 2008 onwards to today. Costs almost doubled in 2 years time.

It shows us that if the gold price were to go to $1500/ounce, nobody would go out and search for gold as it would be unprofitable.

Chart 1: All-in Cost of Gold Mining

Chart 2 gives an operating cost of $700/ounce for gold, but it’s important to notice that the large bulk of the costs go to construction, maintenance, exploration and taxes. Also note that the lowest gold went in 2008 is exactly at $712/ounce in October 2008, which was 10% below marginal cost of production at that time. That low in today’s terms would be $1350/ounce.

Chart 2: Replacement cost for an ounce of gold

With all of this in mind, I believe gold will never go below $1350/ounce. This will be the ultimate floor. If it does, it will quickly rebound.

And for people who are interested in the marginal cost of production in silver, it is around $30/ounce as suggested in this article. So I expect silver to rebound soon.

Max Keiser with Peter Schiff

Max Keiser is one of my favorite reporters ever since his take on Goldman Sachs which went viral on Youtube. I always follow the Keiser Report every week.

It’s an exceptional occurrence to see Peter Schiff and Max Keiser together on the screen so I can’t ignore to put up the video here.

LCNS net short positions Vs. Open Interest

I haven’t looked at this possible correlation yet, but thanks to “goldbug” who reminded me here, I just decided to take a look at this possible correlation.

Apparently, they do correlate. When open interest skyrockets it’s mostly because of the increased net short position of large commercials.

That makes life simpler, you just have to look at the open interest which is given each week on the ‘GotGoldReport‘ site, and you will automatically know whether net short positions went up or not.

If open interest is high, you can be sure that silver will sell off.

Chart 1: Open Interest Silver

Chart 2: LCNS Net Short Positions Silver

Silver Prices Decouple Between Asia and Western World

Andrew Maguire on King World News reveals a shocking truth about the dislocation of silver prices between Asia and London. I already warned in February 2012 that prices between Asia and the Western world would diverge from each other and that manipulation of prices in the U.S. and London will end because of the emergence of Asia and their Shanghai Metals Market, which just recently started trading in silver (in April 2012).

Now, finally, the decoupling is happening and this should be an eye opener for everyone.

Apparently, silver traded at $29.61/ounce in London, while it traded at $32.50/ounce in Shanghai. That’s a premium of 10% over London Spot Price. When the market closed it still traded at around 4% premium.

Of course there could be price disruptions between the two markets because of domestic spot trading. But 10% is a bit over it. Ultimately it’s Shanghai that will win, because their exchange is backed by the real thing, while the COMEX is backed by nothing.

I would like to monitor this premium, but I can’t find live quotes anywhere on the internet (which are free of charge). If I could monitor this premium divergence, it could be a tool to predict if the price of silver will go up or down.

Peter Schiff: Perfect Storm for Silver

Just wanted to share a video about silver with Geoffrey, the CEO of Pan American Silver and Peter Schiff. Apparently the inflation costs for mining silver has been going up as much as 100% in the past several years.

Note the exuberant enthousiasm of Peter, it’s like he is asking a Christmas present from Santa Claus.

Brazil Doubles Gold Holdings in Two Months

Precious metals have been weak for the year of 2012 and investor sentiment is nearing an all time bottom, but I believe we haven’t reached bubble territory yet.

When roaming the precious metals forums, I found out that Brazil doubled its gold holdings in two months time (added 17.2 tonnes in October 2012 and 14.7 tonnes in November 2012. Total holdings now 67.2 tonnes), I just wanted to see if central bank gold buying correlated with the gold price.

And surprisingly, there is a correlation (Charts 1 and 2)! If you look very carefully, you will see that the price of gold goes up when central banks buy gold. For example from 1970 till 1976 we see a net positive buying of gold by central banks. That period was also bullish for the gold price. The same can be said for 1980. Then came a period where central banks slowly got rid of their gold from 1980 till 2002 and that’s a period where gold declined in price. And from 2003 onwards, central banks have slowly shifted from net sellers to net buyers again today.

Keep reading about this analysis here.

Redemption of Paulson Advantage Funds

Zerohedge reminds us why gold has been falling the last several weeks.

Paulson’s Advantage and Advantage Plus funds were said to be dumped by Morgan Stanley. And because 30% of Paulson’s portfolio is in gold (GLD) and another huge percentage in gold mining stocks, this dragged down the gold market and more importantly the gold mining market. To see a recent filing go here.

I don’t believe this is that significant though. Morgan Stanley clients only comprise $100 million of the combined $5.7 billion Advantage and Advantage Plus funds. That’s 1.7% and not even worth mentioning. By the way, the clearing volume at the London exchange can be as much as $3.5 billion a day. So $100 million is nothing.

I wouldn’t put too much thought in this. Paulson and Soros are still bullish as far as I can see.

(if I make mistakes in any numbers mentioned above, please tell me)

Correlation between Industrial Production Vs. CRB Metals Index

Thanks to Bob Garino, who commented on this article, I found out about the correlation between Industrial Production (manufacturing) and the CRB metals index.

Let’s see if this correlation is correct.

I immediately see that from 1990 till 2000 the correlation doesn’t fit. That period was a period where miners were in a bear market as metals prices declined and mining companies were getting worse and worse conditions for mining. Bonds were doing ok in that period.

So I’m a bit sceptical about this correlation. But I’ll still add it to my list of correlations.

Chart 0: Industrial Production: Manufacturing

Chart 1: Industrial Production Index

Chart 2: CRB Metals Sub-Index

China U.S. Treasury Holdings Steady

Nothing spectacular to report in the Chinese buying of the U.S. treasury market.

In October 2012, China’s holdings rose $7.9 billion.

Chart 1: China U.S. Treasury Holdings