Precious Metals Charlatans – Freaks of the Industry
- Posted by kid dynamite
- on July 22nd, 2013
warning – this post consists of a ruthless exposition and deconstruction of several precious metals bloggers. If you read this post, you will be unable to avoid the conclusion that these bloggers are charlatans who do not know what they are talking about.
I have a confession to make, dear readers: I lied to you. I told you a mere 4 weeks ago that I was done correcting gross ignorance in the precious metals space for free. Fortunately for you, I have a compulsion – a disorder of some sort: I cannot stand to read gross factual inaccuracies, especially when propagated by those trying to sell you something.
There’s yet another nonsense meme going around the precious metals blogosphere, spread by charlatans who have absolutely no idea what they are talking about. This is not my opinion: I will show you the facts that prove beyond the shadow of a doubt that your favorite metals bloggers simply do not understand the market they are trying to analyze. What’s important is that this will make it very easy for you to understand that you are being misled by charlatans who do not know what they are talking about.
It all starts with Harvey Organ – a Canadian pharmacist who writes a daily “report” about the gold and silver markets where he cuts and pastes information from different publicly available sources. Harvey Organ then puts his own “interpretation” on the information, based on his complete lack of understanding of the mechanics of the market. His recent meme is related to JP Morgan’s COMEX gold inventories with respect to the delivery notices detailed in the COMEX reports. Unfortunately, Harvey doesn’t understand 1) the difference between the warehouse inventories and the delivery reports, 2) the difference between registered and eligible gold and house/customer accounts, or 3) the mechanics of the COMEX delivery process. Let me explain how Harvey (and all the other charlatans who read him) think it works.
On a daily basis, the COMEX publishes a delivery report (in pdf form) and a warehouse report (in spreadsheet form). The delivery report – available for daily, monthly, and year to date – shows which shorts issued delivery notices. Shorts issue delivery notices, and longs “stop” the notices. The report looks like this:
Again – the issued column represents the shorts, and the stopped column is the longs. You’ll notice that to the left of the firm name, there is a “C” or an “H.” This represents “Customer” or “House” accounts. However, House account trades can be related to customer activity also, via swaps and other structured trades. We’ll come back to that in a moment.
The warehouse inventory report shows each depository’s inventory of registered metal and eligible metal. It looks like this:
The COMEX rulebook explains the difference between registered and eligible metal:
“Eligible” shall mean, with respect to any metal, that such metal is acceptable for delivery against the applicable metal futures contract for which a Warrant has not been issued”
“Registered” shall mean an Eligible metal for which a Warrant has been issued.
“Warrant” shall mean a document of title issued by a Licensed Facility, meeting the requirements of Article 7 of the Uniform Commercial Code (“UCC”), and demonstrating that the referenced quantity of the covered metal , stored in the Licensed Facility referenced thereon, meets the specifications of the applicable metal futures contract”
Are you with me so far? OK – now here’s where Harvey Organ just starts making stuff up: he looks at the total delivery notices issued by JP Morgan’s House (H) and Customer (C) accounts, and tries to compare them to the warehouse inventories of eligible and registered metal. This is an apples to oranges comparison which is invalid, and it’s why Harvey gets the wrong conclusion. Harvey thinks that eligible metal is “customer” metal and registered metal is “house” metal. This is false. This is not debatable – it’s wrong. All deliveries are made with warrants for registered metal. Customer (C) deliveries are not made from eligible metal. However, in the delivery process, the metal need not move. Let me explain: the delivery process consists of the issuer (short) delivering a valid warrant to the stopper (long). That’s it. It doesn’t mean that the short drops metal off at the long’s door. It means that short gives the long a warrant which is valid title to the underlying contract metal.
Now, after the long takes delivery, the long can do whatever he wants to with the warrant. He may 1) detach the warrant (converting the metal from registered to eligible), he may 2) take the metal out, bring it home, and bury it in his backyard, or he may 3) simply hold it as is and sell his warrant next month. What will we see in the depository inventory spreadsheet in each of those scenarios? 1) registered metal decreases while eligible metal increases. 2) registered metal decreases. 3) no change in either category.
If you want to read an example of Harvey’s misunderstanding in his own words, you can read this old post of his (which happens to be a good one, since a commenter – Fred – on Harvey’s own post explained the reality of the process to Harvey yet again, and Harvey refused to acknowledge reality). Or, if you like, you can read Harvey’s blog for any day since that June 3rd post I just linked to. He repeats the same bad analysis *daily*.
So what happened is Harvey Organ made up his own reality and came up with false conclusions. That’s nothing new in precious metals-land: it happens all the time. But what’s great about this nonsensical fantasy is that it exposes many *other* metals prognosticators who clearly do not understand what they are talking about. We know that they don’t understand what they’re talking about because they regurgitate Harvey’s falsehoods without correcting them.
This post arose because I, as a result of my “inability to withstand gross ignorance” compulsion, tried to explain the situation to Bill Holter of Miles Franklin, who sells precious metals for a living. Since the guy sells precious metals for a living, one might expect him not to spout falsehoods in an effort to further those sales, which is why I explained it to him. One would, of course, be mistaken. Our conversation, in the comments of Holter’s own blog with moderated comments, went like this:
“P.S. I will give it one more day to see if JP Morgan delivers from both their dealer inventory and from the customer side. They are contracted to deliver roughly 100,000 ounces more gold IN JUNE than they had in their inventories as of Friday afternoon. As I see it, they need to completely empty their inventory AND deliver another 100,000 ounces to honor contracts. It is still not even clear that delivery was made on the 1,000 call options from May. This is a very big deal if you believe in contract law, if not…oh well, there’s always Dancing with the Stars or the America’s Got Talent to watch.”
“Mr. Holter –
the postscript of this post makes it quite clear that you have absolutely no understanding of how the COMEX delivery process works. I would suggest that you seek out sources other than Harvey Organ to explain it to you.
If you don’t wish to seek out the facts/reality, I beg you to stop misinforming your readers with charlatan nonsense.
Holter replied with simple regurgitations of Harvey Organ’s inaccuracies, in typical metals-charlatan fashion:
“vault inventory has moved very little in the last month, nothing has entered the dealer side and 217,000 ounces exited the customer side. They have issued almost 6,000 contracts or about 600,000 ounces of Gold for June delivery…where is it? Did it move? Was it delivered? How was it accounted for? Did “settle” in cash…that would be illegal. Or did it settle in GLD shares?”
I explained it politely:
there is no “Dealer” side or “customer” side. Again – if you “learn” about the COMEX from Harvey Organ, everything you know will be inaccurate.
there is “registered” metal and “eligible” metal.
and there is no reason why the numbers in the COMEX warehouse inventory spreadsheet need to change when deliveries are made – that is NOT what COMEX deliveries mean. Several people have tried to explain this to Harvey Organ in the past. This is my first and last effort to try to explain it to you. You can re-quote nonsense from Harvey all you want – it will not get any less false.
so to answer your questions:
the 6000 delivery notices issued from June: yes, they were settled. what happens is that the warehouse receipt is given (From the short, the “issuer”) to the new owner (the long – the “stopper”). No metal moves in this transaction. It’s like a coat check – the claim tag has been given from one party to another. IF and only if the new owner decides to move or reclassify the metal, you will see the warehouse inventories change.
No, it did not “Settle in cash” or “in GLD shares”.
I suggest you familiarize yourself with what an EFP (Exchange for Physical) is, and with the concept that JP Morgan and their customers can hold metal at other COMEX vaults (don’t forget: JPM’s vault didn’t even exist until a few years ago, yet they still traded on the COMEX before then, right?). Then you’ll understand how these delivery notices are issued month after month.”
Holter, like most charlatans, simply wanted to perpetuate his fantasy, and tried to change the subject to other memes:
“of course it is registered and eligible but easier for people to understand “dealer and customer”. Yes I understand that receipts are issued, however those receipts are presented and metal either has to move between custodians, be adjusted between the eligible and registered sides or withdrawn. We have not seen anywhere near this for June. GLD and SLV shares have in the past been used in “settlement” and are now “allowed”. I did see your response to Dave Kranzler regarding the audit process of GLD…you forgot to mention the sub custodians …sub sub sub custodians and how JP Morgan cannot be held responsible. Also the CME now has a disclaimer on their website regarding inventory numbers and how they cannot be held responsible, gives you a warm and kinda fuzzy feeling”
I explained it again, including a link to a previous post I’ve written debunking other charlatan memes:
when you start with a false thesis, you arrive at false conclusions. In this case, your false thesis is:
“however those receipts are presented and metal either has to move between custodians, be adjusted between the eligible and registered sides or withdrawn. ”
no. false. that’s factually incorrect. that is simply not how it works. it’s not something we can debate – your understanding of the COMEX process is flawed, which is understandable, because you learned it from Harvey Organ. You ignored the coat check analogy, which should help you understand. If I deliver COMEX warehouse receipts to you, there is no change in registered metal, eligible metal, or total metal. The warehouse receipts are just in different hands now (yours, instead of mine).
and yes, it’s “easier” for people to say “dealer and customer” but it’s wrong, and it leads to people who don’t understand the process, like Harvey, and then you, and then all of your readers.
and no, GLD shares cannot be used to settle COMEX contracts. that’s false. I’ve already debunked that nonsense:
Bill Holter replied again with another misconception, which I again politely corrected, but he refused to publish my final comment. I would have hoped that Holter had understood my very simple explanations, but he continues to spout this nonsense in subsequent posts:
“Unless someone can show me where JP Morgan has concluded their May deliveries or delivered anything at all on their June deliveries I will assume that I have read their reports correctly and are in serious arrears. Please, send me data that illustrates the movement of gold from JP Morgan to those contractually entitled to receive it.”
Charlatan, folks – CHARLATAN.
The question is: is Bill Holter misinforming you out of ignorance? or out of malice? And which is worse? I’ll leave that to you to debate… let’s move on, since Holter is not the only one exposing himself by re-quoting Harvey Organ’s ignorance.
Let’s look at who else clearly doesn’t understand what they are talking about:
Turd Ferguson – in a post today – demonstrates that he doesn’t understand the process, but rather is a Harvey Organ regurgitator.
Jim Willie – via Turd Ferguson’s comments – is in the same boat.
Russ Winter – does not understand the COMEX markets – note that Russ also refused to acknowledge reality when a commenter (Kohala Kid, who is not me) tried to explain it to him clearly.
Even your favorite – Zerohedge – alludes to this false meme: “For over a month, JPMorgan managed to mysteriously avoid matching up the gold held in its (world’s largest) vault with the Comex delivery notice update.” (KD: no – no they have not…)
Of course, we already know that Jesse of Jesse’s Cafe is a charlatan, as is Dave In Denver. There are a plethora of others – this post is giving you the tools to recognize nonsense when you see it. ANYONE who is repeating Harvey Organ’s false analysis and conclusions lacks an understanding of the COMEX metals markets.
I’m sure that someone will falsely accuse me of ad-hominem attacks on these poor misinformed bloggers. Nothing could be further from the truth: these bloggers are DEMONSTRATING (and I am explaining…) a gross lack of understanding of the markets they are purporting to be able to explain to you. This is a gift to you, dear reader, as you can clearly see that they do not know what they are talking about. Again, the Sophie’s Choice lose-lose question you have to ask yourself is:
Are they misinforming their readers out of ignorance? Or out of malice?
And oh by the way – despite the fact that the analysis of JP Morgan’s vault inventories with respect to delivery receipts is blatantly inaccurate, JP Morgan’s gold inventories at the COMEX are indeed decreasing. Is this a sign of impending doom for the bullion banks? I will point out a few *facts* for you:
1) JP Morgan’s depository accounts for only 6 percent of the COMEX stocks.
2) JP Morgan opened their COMEX depository a few years ago (in 2010 I think)… Do you think that they didn’t trade gold on the COMEX before they had their own depository? Do you think that only firms with their own depository can trade gold?
Perhaps JP Morgan is winding down their vault/warehousing business? Perhaps related to this recent story?
This post would be incomplete if I didn’t explain the title. I was listening to the Digital Underground classic “Freaks of the Industry” this weekend, and a line resonated with me:
“Now if there’s a cure for this, We don’t want it, we’ll run from it.”
The precious metals charlatans, as evidenced by the comment thread discussions I pointed to above on their own posts (mine with Holter, Fred’s with Harvey Organ, and KohalaKid’s with Russ Winter) don’t WANT to know the truth – they just want to spread a story like financial herpes… There’s a cure for their gross ignorance, but they don’t want it – they run from it.
and so it goes…
In closing, I’d like to quote myself:
“I will simply repeat this fact: when your theses are based in false foundations, you can only be “correct” out of dumb luck. One shouldn’t be surprised when the predictions made by charlatans who rely on nonsense themselves turn out to be nonsense.”
disclosure: You might note that this post gave absolutely NO VIEW on the price direction of gold. This post is not about gold – it’s about misinformation by gold bloggers. I am currently long GC and short PL – long gold vs short platinum futures.
Kid Dynamite is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small commission, yet you don't pay any extra. Thank you for your support.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
This blog has morphed from a discussion of poker hands and theory into an evaluation of financial markets from the point of view of a former trader. More »
If you'd like to make a donation, I always appreciate it:
I'm also a member of the Amazon.com Affiliate program.
- Deciphering Ackman’s Updated Valeant 13D for Pershing Square
- SEC Finally Busts Guy for Manipulating Stocks via Twitter
- Healthcare is F*cked – Part 932
- Now THIS is How You Advertise: SquattyPotty
- Healthcare is F*cked, Part 416 – Public Service Announcement
- WYNN Earnings Call Tidbits: Q2 2015
- Gold Miners Are Cheap. (?)
- What If Every Amazon Package Was An Advertising Opportunity?
- Do You Hedge Your Home Heating Oil Exposure?
- November 2015
- October 2015
- August 2015
- July 2015
- June 2015
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011
- December 2010
- November 2010
- October 2010
- September 2010
- August 2010
- July 2010
- June 2010
- May 2010
- April 2010
- March 2010
- February 2010
- January 2010
- December 2009
- November 2009
- October 2009
- September 2009
- August 2009
- July 2009
- June 2009
- May 2009
- April 2009
- March 2009
- February 2009
- January 2009
- December 2008
- November 2008
- October 2008
- September 2008
- August 2008
- July 2008
- June 2008
- May 2008
- April 2008
- March 2008
- February 2008
- January 2008
- December 2007
- November 2007
- October 2007
- September 2007
- August 2007
- July 2007
- June 2007
- May 2007
- April 2007
- March 2007
- February 2007
- January 2007
- December 2006
- November 2006
- October 2006
- September 2006
- August 2006
- July 2006
- June 2006
- May 2006
- April 2006
- March 2006
- February 2006
- January 2006
- December 2005
- November 2005