Gold Price - Where is it heading?

[Value Collector]

On the details, Buffett has actually sold gross notional on the index put options (over four indices) of $32bn. Furthermore, he has undertaken CDS swaps with maximum loss of $8bn. These are not generally collateralized. To your example, it is technically possible for BRK to bankrupt because of large catastrophe losses (where retentions go into the multi-billions) mixing in with adverse movements in derivatives as above. The likelihood of that, however, is pretty darn remote. Still, it isn't zero.

.

nothing is zero risk, but buffet could pay out those in cash today even at the full 100% loss, Berkshire has nearly 40 Billion reserves, not to mention that the bulk of the large ones aren't maturing till between 2017 and 2021. And for there to be a 100% loss every company in the index would have to go to zero.

 

[DeepState]

nothing is zero risk, but buffet could pay out those in cash today even at the full 100% loss, Berkshire has nearly 40 Billion reserves, not to mention that the bulk of the large ones aren't maturing till between 2017 and 2021. And for there to be a 100% loss every company in the index would have to go to zero.

BRK is essentially a listed, levered, managed fund which has a bunch of listed stocks and a bunch of other investments, including an insurance business.

The total assets, with mark to market holdings for listed securities was $504bn. PPE, investments in rail etc are all subject to impairment charges. Fair value reporting for these would have about a $5bn upwards shift, primarily for the rail etc. assets. The liabilities on balance sheet were $257bn. These do not include full notional value of derivatives of course, which are contingent. On the liquidity side, they hold cash and equivalents of $49bn which all sounds great until you consider offsetting short term borrowings of a similar nature of $25bn.

Doesn't look quite so bulletproof when the financials are actually considered.

It would not require anything like a 100% fall in market values to move the balance sheet into insolvency. Still, the chances are not exactly high but they are far from theoretical. Further, the interest burden is low so cashflow insolvency would not necessarily be an immediate problem even if the head entity is trading at negative equity....pity for the shareholders though.

Nothing is zero risk. However, BRK is at a higher level of risk than some seem to imagine given the statistics some bring to bear. In the event BRK suffers gross impairment to its balance sheet, something big has gone wrong. Gold will probably still be standing and have an increased degree of purchasing power than a BRK stock. Before we get into it again, this is different to saying gold will outperform BRK over the next millennium. BRK is in the insurance business. So is gold.

 

[DeepState]

Notional derivatives value = $99,600,000 Whooooo looks like a big scary number hey? But we are talking $10,000 move per basis point per side and where one side gain is robbed by the other sides loss. There is nothing here. If the value of these two sided trades moves more than 0.1% per day we are talking exciting times.

And then there are the ISDA master netting agreements and ongoing moves towards further collateralization. Plus there are agreements not to use credit events to pull derivatives contracts amongst the major banks and thus prevent adding fuel to the fire causing a liquidity event on top of a solvency event.

Lehman fell over with leverage of around 100x with illiquids on balance sheets that could not be adequately hedged or used as collateral when the going got tough. JPM is 10x leveraged and has a stack of liquidity. The exposure to derivatives is less than 5% of gross notional after allowance for netting. To your point.

 

[Uncle Festivus]

Yes the way you have used them is absolutely wrong because you don't understand what you are quoting. That is my point yet again. You read the headline number and make the worst assumption based on nothing more than fear and hope of disaster. Sure in one way they are correct figures but you cannot actually read much in to them.

All taken on board, thanks for the info, although I do understand the terms. The point that is trying to be made, and it should/could have been put forward better, is that with these instruments all is fine until the status equilibrium is tested, perhaps by a counterparty with problems in other areas.

(For others info....)

Credit risk in derivatives differs from credit risk in loans due to the more uncertain nature of the potential credit exposure. With a funded loan, the amount at risk is the amount advanced to the borrower. The credit risk is unilateral; the bank faces the credit exposure of the borrower.

However, in most derivatives transactions, such as swaps (which make up the bulk of bank derivative contracts), the credit exposure is bilateral. Each party to the contract may (and, if the contract has a long enough tenor, probably will) have a current credit exposure to the other party at various points in time over the contract’s life.

Moreover, because the credit exposure is a function of movements in market factors, banks do not know, and can only estimate, how much the value of the derivative contract might be at various points of time in the future.

Measuring credit exposure in derivative contracts involves identifying those contracts where a bank would lose value if the counterparty to a contract defaulted today.

The next premise being that markets are no longer price discovery mechs anymore, and I would put forward that the longer the CB's continue to make artificial demand then the real market makers will either exit voluntarily or forced out by collapsing margins.....

As for gold, it has held remarkable well considering that equities have hit records, again, and the $DXY hit a 4 year high.

 

[Trembling Hand]

Speaking of :fan This has the potential to get nasty here. After the Japanese QE round 98 announced last week gold acted opposite to what you would expect. That to me is a warning that it's playing a 'different game'.



Looks crashy.....

 

[zac]

After the Japanese QE round 98 announced last week gold acted opposite to what you would expect. That to me is a warning that it's playing a 'different game'.

Looks crashy.....

Hi TH, im wondering if you have your tin foil hat on lol
I haven't looked too much into gold. I do believe it was manipulated last year when it tanked, but right now I think there is a level of manipulation on Oil.

When you say "looks crashy"
To what level?
Im wondering how low it can go but considering its already had a substantial drop im thinking 950.

Paper gold and physical gold are doing the opposites too. So its hard to put logic into this and I can totally see where Warren Buffett is coming from when he says "how do you value gold"

Given several gold miners are now not making profit on what they are mining, supply is subdued.
But hey, you have to love our fractional banking

 

[skyQuake]

Phys demand not looking good either.

http://in.reuters.com/article/2014/11/03/gold-demand-asia-idINKBN0IN0TW20141103

Also I have the same problem.
Roughly half the stocks I buy are manipulated downwards so I lose money.
And Roughly half the stocks I short are manipulated upwards.

Outrageous!

 

[zac]

Phys demand not looking good either.

http://in.reuters.com/article/2014/11/03/gold-demand-asia-idINKBN0IN0TW20141103

Also I have the same problem.
Roughly half the stocks I buy are manipulated downwards so I lose money.
And Roughly half the stocks I short are manipulated upwards.

Outrageous!

Cheers for the link,
That's interesting, I guess I assumed too much there. Perth mint is selling out of silver very fast as well as other physical outlets.
When gold was smashed last year the physical demand in India and China really took off. I didn't realise it wasn't the case this time around.

Ive only been in the game a few years but having spoken to fund managers etc, they certainly agree its a period they've not experienced before. Seems the rules have changed.
Then you have the S&P500 on quite a bull run, bonds stacked to the hilt with funds, money being printed non-stop, no real inflation, low yields.

What to make of all this hey.

 

[Trembling Hand]

Ive only been in the game a few years but having spoken to fund managers etc, they certainly agree its a period they've not experienced before. Seems the rules have changed.

What does that even mean?

 

[zac]

What does that even mean?

Yeah my bad, I thought it didn't make much sense lol after I read it.

Kind of like what you were saying, QE should make commodities increase in value.
With the S&P 500 making new highs you'd expect money to rotate from bonds to equities, and therefore yields rise.
With all the loose monetary policy, to have created an inflationary environment.

 

[Uncle Festivus]

Speaking of :fan This has the potential to get nasty here. After the Japanese QE round 98 announced last week gold acted opposite to what you would expect. That to me is a warning that it's playing a 'different game'.

Looks crashy.....

I thought you of all people could work that one out? As per A, FOA & FOFOA it's all about the currency war underway. With the EU looking like it's back to recession like growth (if they are lucky?) and Japan attempting financial Hara-Kiri, what else have you left - the cleanest dirty shirt USD. USD get's pumped, everything else get's dumped, casualties along the yellow brick road...................until the advantages of a strong dollar start to work against them, then it's game on for young & old??

In Yen terms not much change at all (not counting tonight's dumparama)



Although it looks to be DXY technical they will try (and look to be succeeding) to break supports along the way for good measure?

Here's one for you - ZH is reporting the usual $1.5B notional gold dump(s) the last few days - what do you make of it?

 

[dengo]

Looks crashy.....

Looks like another descending triangle

Target = 1182 - ( 1428 - 1182 ) = $936

View attachment 58128

Agree...$1182 support broken

 

[Trembling Hand]

I thought you of all people could work that one out? As per A, FOA & FOFOA it's all about the currency war underway. With the EU looking like it's back to recession like growth (if they are lucky?) and Japan attempting financial Hara-Kiri, what else have you left - the cleanest dirty shirt USD. USD get's pumped, everything else get's dumped, casualties along the yellow brick road...................

Or everyone who matters has finally given up on the idea that mega inflation is coming. I mean the bugs have been saying it's 6 months away since 2001.

I guess after 13 years of being wrong a few would give up and look for something a bit more productive.

As for ZH I haven't noticed any massive volume but will check the open interest change tomorrow.

 

[zac]

I guess after 13 years of being wrong a few would give up and look for something a bit more productive.

The few guys who predicted the subprime credit crisis. They were wrong for a few years too

Probably my lack of maturity in the markets, ive not heard of inflation bugs for as long as 13 years. I have heard it being bellowed since all this QE and 'currency wars' have started.
Im a firm believer though that nothing in this universe can happen without consequence, ie for every action there is a reaction.
So at some point there has to be a reaction.

 

[skyQuake]

So at some point there has to be a reaction.

Of course, but 'markets can remain irrational longer than you can remain solvent'


Look at all the smart guys that tried to short the dot com bubble in 1998

or the Widowmaker Trade

 

[zac]

or the Widowmaker Trade

I've been taught by the school of hard knocks in relation to how a market can remain irrational.

Nice article re JGBs, and I know of other yield trades that cleaned people out.
A fund manager I followed was trading options to express his bearish JGB view (and I believe still is).
Too many people have a severely fragile portfolio.

 

[Uncle Festivus]

Or everyone who matters has finally given up on the idea that mega inflation is coming. I mean the bugs have been saying it's 6 months away since 2001.

I guess after 13 years of being wrong a few would give up and look for something a bit more productive.

As for ZH I haven't noticed any massive volume but will check the open interest change tomorrow.

If asset bubbles are the results of monetary inflation then it's been rampant for the last X number of years - global property prices bubbles popping along the way (can't wait to see what ours looks like soon ). Oil price spike to $150, and recently high end art, property and autos. The 'official' inflation calcs are a croc!

Having said that, if the QE did actually start to escape the coffers then there would be a huge real economy inflation problem? As it is, with the currency wars underway it's a beggar thy neighbor race to the bottom of deflation exporting. Either way the end result will be good for gold, it just doesn't like the 'stability' of the USD at the moment.....

Could be a short covering/technical bounce from here - any week now ????

 

[So_Cynical]

Of course, but 'markets can remain irrational longer than you can remain solvent'

Take away leverage and staying solvent is pretty easy, irrationality is irrationality and needs to be taken advantage of much like fear, greed and stupidity.

Some of the Gold stocks are trading at irrational prices, my old favourite (TRY) Troy in particular caught my eye trading at below its GFC low and that was with the world ending and POG at around $700

 

[zac]

On the 30th of November the Swiss will have a referendum on whether the SNB should buy gold reserves.

I've only just become aware of it so getting my head around it. Im guessing by the drive down in gold price its unlikely to be in the affirmative.
prepare-for-gold-rally-if-swiss-bullion-referendum-passes.html

 

[skc]

A dangerous chart pattern emerges in Gold.

http://www.cnbc.com/id/102147311#