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Doug Pollitt: Of bullion, backwardation, and Buffett
12:30a ET Monday, September 2, 2013
Dear Friend of GATA and Gold:
Taking over the market letter of Pollitt & Co. in Toronto from his much-missed father, Murray Pollitt, who died last year (http://www.gata.org/node/10981), Douglas Pollitt has written what may be the most incisive analysis yet of the lengthening phenomenon of backwardation in gold.
Much gold recently has been dishoarded from exchange-traded funds and mining companies have resumed hedging, Pollitt observes, but gold lease rates keep rising, implying scarcity.
"One of the main push-backs we get when peddling gold," Pollitt writes, "is that there is so much of it. Many bulls feel this way too; for them gold is going up not because it is not plentiful but rather because paper money is more plentiful. Market behavior corroborates this: Producer margins in the gold sector pale in comparison to producers of base metals and petroleum -- why provide a profit incentive to produce more when we already have vaults full of the stuff?
... Dispatch continues below ...
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"But vaults can and do empty. Let's go back to [Warren] Buffett: In early February 1998 Berkshire Hathaway came out of the woodwork and announced that it was they who had been buying silver; the company had taken delivery of 87 million ounces and it was standing for delivery of an additional 43 million ounces. The market reacted violently, especially the front-month contract. Those short immediately appreciated that this was not just another bluff -- they'd have to find the metal! All hell broke loose.
"It turns out Buffett likely never did take delivery of the entire 130 million ounces. The 1997 Berkshire annual report showed holdings of only 110 million ounces. It is fair to speculate he settled for the rest in cash. The cupboard was, apparently, bare.
"Gold is certainly a deeper market than silver but the notion of there being infinite supplies is a mirage just the same."
As his dad so often did, Pollitt has kindly allowed GATA to post his commentary in PDF format, complete with charts. It's headlined "Of Bullion, Backwardation, and Buffett" and it can be found here:
http://www.gata.org/files/PollittMarketLetter-08-26-2013.pdf
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Actin Committee Inc.
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