"We live in a world where love itself is condemned. People call it weakness, something to grow out of. Some are saying: 'Let each one become as strong as he can, and let the weak perish.' They say that the Christian religion with its preaching about love is a thing of the past. The neo-paganism [of the Nazis] may well cast off love but, in spite of everything, history teaches us that we shall be the victors over this. We shall not forsake love." Titus Brandsma, executed at Dachau, 26 July 1942
Koos Jansen has an interesting piece out this morning, that asks some very insightful questions in the ongoing attempt to connect the dots between the shocking decline in the 'float' of unencumbered gold out of the London Vaults with the tremendous, and not always fully visible, flows of gold into strong hands and Asian Vaults.
As you may recall it was Koos' groundbreaking work in analyzing the Shanghai Gold Exchange that blew the lid off the enormous flows of physical gold into China, despite the stubborn opposition of some well paid establishment analysts.
And all of this is relevant to what some have called 'the currency war,' which is the attempt to forge a new international monetary regime out of the ruins of the Bretton Woods Agreement and the fiat petrodollar.
This analysis ties together with a number of highly significant events, including the backwardation of gold price, the flight of gold from the registered category at Comex, and the tightness of physical supply in London as shown by lease rates and informed observations, despite the usual scoffing from apologists.
I have seen various estimates that the London float is now adequate for about 4 to 12 months at most, given this draining of supply, before the market gets into serious trouble. That is unless a central bank or gold pool friendly semi-official fund undertakes to divest itself of more their nation's gold, as England apparently did by selling their sovereign gold wealth on the cheap near the turn of the century to bail out their banking chums, in the odd case of Brown's Bottom.
The gold in this current instance seems more likely to have been taken out as leases and sales from custodial gold holdings at the Bank of England, and the stores of gold that is backing ETFs and Funds in private vaults, having been disgorged by the actions of their participants and custodians, often the self-dealing bullion banks.
Perhaps this is mistaken. Perhaps there is a reasonable explanation for all this oddness in the gold market. Good then let us hear it, and not these silly scoldings and transparent fabrications of nonsense that seem to be the stock in trade of the bullion bullies and paperati which only serve to fuel more doubt and questions.
And why is it again that the US and UK were unable to return Germany's national gold stores in a reasonable timeframe? And India desperately looks for ways to limit their peoples' appetite for physical bullion of their own? So many questions, so much leverage, secrecy, and stonewalling.
As Koos Jansen observes:
Consider the following:
Good Delivery gold bars can be monetized – in countries like the UK, Hong Kong, Switzerland and Singapore – from where they can be shipped into China while circumventing global trade statistics. This is because monetary Good Delivery gold bars are exempt from global trade statistics (UN, IMTS 2010). Needless to say monetary imports into China are conducted by the PBOC.
Non-monetary Good Delivery gold bars (declared at international customs departments) imported into the Chinese domestic gold market are required to be sold through the SGE. However, trading volume at the SGE in GD bars has been a mere 3 tonnes in all of history.
We can thus conclude that if any Good Delivery gold bars have entered China these did not go through the SGE system where Chinese citizens, banks and institutions buy gold. Instead, it’s likely that the Good Delivery gold bars that crossed the Chinese border went directly to the PBOC vaults...
Nick Laird and I noticed that although the total amount of physical gold in London fell roughly 2,744 tonnes (9,000 – 6,256) over four years (graph 1), only 997 tonnes were net exported as non-monetary gold (graph 4). This makes me wonder where the residual 1,747 tonnes (2,744 – 997) went. Possibly, this gold has been monetized in the UK and covertly shipped to a central bank in Asia, for example China. I don’t have rock hard evidence, but it fits right into the wider analyses.
One thing that is strikingly odd about this is that it is one of the more revelatory accumulations of data on the shadowy corners of the global gold market since Frank Veneroso's seminal study of the flows in the gold market involving central bank gold at the beginning of the great bull market that began at the start of the new century.
And yet so many sites still have not picked up on this sea change and unfolding currency war, despite it tying together so many other observations and data and market tremors. Perhaps it is insufficiently pedigreed. The contrarian perspective says that this may be the hallmark of the real thing.
The gold pool is expressing some interesting dynamics that appear to be winding towards a denouement of sorts.
The current trajectory could change if the price is allowed to rise to clear the market, or any number of other seemingly improbable events.
The silver market is also acting very oddly. I have not gotten a real handle on that, other than soaring premiums for coins and a lack of serioius buying in the US compared to the rest of the world. Similar to gold in some ways, although the central banks have no stockpiles of silver with which to rescue the bullion banks, again.
It is funny but few seem to notice these things, or even care, for whatever reasons that people do not notice something until it is too late to do anything meaningful.
I think that sometimes we can become 'victims of the ordinary.' When the same thing happens again and again, we expect the same thing to happen next, and any change from this pattern seems almost unimaginable.
"My main focus is to try to bring into context the size of the "London Float" out of the shadows and into the light of day. The London Float being the working supply of gold available to meet the markets daily needs.
One must treat this with the consideration that much of the known gold shown is already owned & not available to meet the markets needs - not unless the owner wants to sell. The presumption being that the Central Banks reserves are not available to the market. They do lease/swap but under their own intent and of late the trend has been to not lend in risky markets but rather to claw back physical into direct ownership.
The years around 2000 were when the Mine Hedge Book was most active with approx 3200 tonnes being lent into the markets by the Central Banks. By 2007 much of the Hedge Book had been closed out & they were under 1000 tonnes falling under 100 tonnes by 2013. From 2011 gold repatriations of Central Bank reserves started & since then have only grown.
So one presumption from this study is that over time the stance of the Central Banks has been to reduce their lending and bring their gold closer to home. Hence the presumption that the gold held in the Bank of England is mostly all there, unencumbered and released from leasing and swaps. Obviously some will still be lent out but the presumption is that the tonnages lent out are far smaller than in the past...
The UK Imports approx 602 tonnes per year & exports approx 388 tonnes per year (since 1999) according to the EuroStats database (thanks kindly Koos). However with the recent gold demand from Asia these statistics have changed dramatically. Since the start of 2011 the UK has imported 2982 tonnes & exported 3998 tonnes with net exports of 1016 tonnes seeing exports double their normal average to 800 tonnes per year.
This leaves the London Vaults with a FLOAT of between 1361 tonnes and 200 tonnes with the probability that it is closer to the lower number. If it is closer to 200 tonnes then London does have a problem as a FLOAT of this size is not enough to cover their flows for 4 months."
It is reasonable to estimate that London, in all the vaults, has only about 900 to 250 tonnes of gold available for physical delivery, which is a shockingly low figure given the current demand from 'The Silk Road' nations alone that is running about 1,700 tonnes per year. And even that 250 number is questionably high, depending on the status of the gold in the Bank of England.
The objective is to attempt to determine how much available physical gold for delivery can be wrung out of London and New York, in excess of what can be had from scrap, minining and leasing. We are calling that 'the gold float,' and it is feeding the demand for bullion in Asia. At that point we might estimate when the pressure on price becomes irresistible.
We are thinking months, not years, at least with things as they are.
I wish to acknowledge up front the debt that is owed to Ronan Manly and Nick Laird especially for the data contained herein, as well as Koos Jansen for his ground breaking work in estimating Asian gold demand, and Bron Sucheki for his participation.. I have listed some of the pertinent published articles below.
It is regretful that one can only provide estimates. But that is the nature of this beast that operates with secrecy of supply and distortion of actual demand.
What manner of business is this to enable price discovery in a public market, by covering so many fundamentals with secrecy? Where is the mining community in all this?
The LBMA is said by those who are in a position to know these things to be running 90:1 or more leverage to each of its unallocated ounces of gold, which according to Jim Rickards is all of them.
The potential claims per deliverable ounce at the Comex right now is at an historic nosebleed high by of about 255:1, supposedly because the owners which to avoid a 'short squeeze' in bullion, although the party who said this did not say 'where.' London probably, maybe Switzerland.
Peter Hambro says that "there is not enough physical about. There are endless promises."
In a nutshell, we now know that physical gold for global delivery, of which the London vaults are a major supplier, are rather tight, especially given the increasing demand for physical bullion in the East.
There is plenty of room for questioning the numbers and casting doubt on them, while hiding behind a curtain of exchange secrecy. One might suppose that the gold bullion bank apologists will be hard at it soon enough again.
They too often do not help to advance the understanding of the public, preferring to selectively twist the data to say 'all is well.' They deride the supply problems that people in the industry are encountering, always saying they are not real. And they like to include all the gold that exists in the warehouses for their calculations, whether someone else already owns it and is clearly not interested in selling at these prices.
More details would be useful, because if we could obtain a better idea on the extent of central bank leasing, we would be better able to estimate the risks and the relative fragility in the highly leveraged and hypothecated supply of gold in New York and London.
One would think from the known data that the unallocated gold in London is counter-claimed many times, and even the allocated and custodial gold is likely to have multiple claims upon it. So the actual 'gold float' is probably quite a bit less than 1,361 tonnes. Each of us has our own favorite ballpark number ranging from 900 to 250 tonnes and less, not fully accounting for leases and leverage on the remaining stock.
Nick Laird had a secondary outlier estimate which he expressed in colloquial Australian, which I dare not repeat here. But it was quite low. lol. Maybe four months worth of float left.
And it would certainly be nice to have more information about silver, especially since to my knowledge the central banks have dealt their own supply away some years ago and there are quite a few indications of tightness of supply, although not in the Comex yet.
I do consider this analysis to be a work in progress, Nick Laird and Ronan Manly are the key data organizers I believe, with help from Koos Jansen and Bron Suchecki, and the odd bit from Jesse the consulting detective. So I would look to their sites for explication of their methods and sources. Ronan Manly in particular is a public source and he goes into quite a bit of detail.
Given the struggle it has been to obtain the data, and the refusal of central bank personnel to discuss their own supplies on orders from above, there may surely be gaps and errors in this, but not for lack of effort.
If I have any major concern it is that the management, the exchanges and the regulators, will allow the traders to sleep walk themselves into a rather serious situation. And don't we know how little self-restraint these traders have been showing.
The remedy for this situation is not even more leverage, or more hypothecation of the unallocated stock, or even more leasing by the central banks, or more programs in India to dampen demand.
The longer they allow this price rigging and leveraging up, the slower productive mines will come on line, and the worse the tightness on the remaining physical supply will become. But as they say in New York and London, 'nothing is broken yet.'
The market solution for this tightness of supply is HIGHER PRICES and not increasingly ludicrous jawboning, spin, and bear raids.
And if higher prices might inconvenience the policy and perception management aspirations of the Wall Street financiers, their enablers and associated hirelings, well then too bad. Try to behave more responsibly, and stop attempting to make the rest of the world pay for your excessive gambling losses and poor judgement.
Here are a few additional charts from Nick Laird's site at goldchartsrus.com to break out a bit more detail and to provide some context for the estimated physical supply compared to physical demand.
physical tightness of flow is reflected in the price not at all.
Gold is moving in one direction from west to east with small exceptions over the last year.
The danger of less supply moving forward is more likely than the comfort of more supply."
I found this discussion between John Ward of Physical Gold Fund SP and an executive at one of the top Swiss Refiners highly informative, and suggest that you give it a listen.
The most difficult part I have found in presenting information is that once a group has amassed a great deal of data and putting it into some organized form of information, an arduous task indeed, the next step of taking that information and putting it into a relatively simple and easier to understand format is a very important task and none too easy in itself.
I certainly learned that lesson through years of making presentations to the principal executives of Fortune 100 companies. Most of the time they wish to have everything on one sheet or slide, with backup optional for their staffs or key questions they may ask in 'drilling down.' If you have ever worked at a large company I am sure you know the feeling.
I hope to have something out on this issue later day.
But this is quite interesting and stands alone. We have been hearing about this 'tightness' from quite a few quarters recently including some bank analysts and Peter Hambro.
You may read about this and listen to the actual podcast at Physical Gold Fund.
The gentleman we are interviewing is part of senior management of one of the largest Swiss refineries. His refinery is one of only 5 global LBMA referees, which takes samples from other refineries around the world and certifies them to produce gold meeting the purity and form factor of the LBMA good delivery standard, which makes it part of the very core of the industry globally.
He has over 30 years experience in the gold markets and has in our view one of the most authoritative perspectives into global physical gold flows in the world. His unique outlook, formed from internal data on gold flows through the refinery, combined with colleagues throughout the industry including the largest bullion banks (versus news outlets) is an invaluable source of information and paints an important picture for the gold markets moving forward.
Topics include:
*Why trying to correlate physical flows with the price can be misleading;
*On-going tightness in the physical gold markets;
*There is less liquidity in the physical market;
*The physical tightness of flow is reflected in the price “not at all”;
*As long as the spot market is settled with cash settlement, the physical flows are not determining price;
*If investors dealing in cash markets begin to take delivery, the physical is just not around;
*The current pricing mechanism can continue indefinitely unless investor behavior changes to taking delivery versus cash settlement;
*The gold price has “no correlation to the physical market”;
*If this behavior changes (to taking physical delivery) it could become dramatically dangerous;
*Gold is moving in one direction from west to east with small exceptions over the last year;
*90% of the refinery’s business is currently supplying demand from the east (India, China) and 10% to western markets;
*China has imposed a new standard on the LBMA good delivery system of 1 kilo, 999.9 fineness;
*400oz bars being melted and refined to 1 kilo 999.9 fine bars and shipped into China are coming out of London and particularly the ETF’s such as GLD;
*In the next gold upleg, scrap may not be readily available – overall scrap has decreased remarkably;
*Declining investment in the mining sector and geo-political issues affecting mining viability will unavoidably reduce gold supply moving forward;
*The danger of less supply moving forward is more likely than the comfort of more supply.
"Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise."
Alan Greenspan, Testimony Before the Committee on Banking and Financial Services, U.S. House of Representatives July 24, 1998
"Secrecy is completely inadequate for democracy, but totally appropriate for tyranny."
Malcolm Fraser
We are going to have an option expiration on the Comex on this Thursday the 24th. I am not expecting it to be a big event, since October is a light contract, with the real attention and action being concentrated in December.
However, there are over one thousand puts at the 1125 strike, so the cynical me might call that good support.
If I were trying to skin the specs and holders of options with shallower pockets, I would take gold down to about 1120ish, suck in more puts and scare the calls out, and then take the price up and skin all those put holders at expiry.
But this is a one dimensional view of the market, and does not take into account the trade in London and in the vastly out of control derivatives markets. Or the side action in the miners and ETFs for that matter.
There were no (zero) deliveries for gold and silver at The Bucket Shop yesterday.
The slow bleed out of the bullion warehouses continues.
I recall some fellow, I think it was from Barclays, saying that the record low plunge in deliverable (registered) gold bullion at the Comex was because those who owned it did not wish to see it stopped out 'in a short squeeze.'
And I remember thinking at the time, what short squeeze is he referring to? The non-delivery Bucket Shop?
And then the rumours regarding the shortage of delivery ready bullion at the LBMA came out, Peter Hambro said it was 'almost impossible to find,' and a few analysts noticed that the gold is in backwardation, meaning a premium is being paid for real gold in hand.
And then Rickards said that he thought a couple of Banks were in a pinch on delivery in London and were hedging their exposure in the futures in New York. As he noted, London is a 'fractional reserve' system, as is The Bucket Shop with a stated assumption of 2% redemptions, as are some unallocated depositories.
If this game of musical gold gets dodgy, it could begin to fall apart as fast as MF Global swirled down drain. I would not wish to see that. I would greatly prefer honest markets that are not so recklessly fragile, in which the small investors is not exposed to so much unknown counterparty risk.
The Banks participating in the London fix are now Barclays, HSBC, SocGen, Bank of Nova Scotia, UBS, and Goldman Sachs.
The Banks which Rickards said were rumoured to be caught short physical deliveries and had been hedging on the Comex with longs are JPM and Citi.
I should note that Jim, for all his expertise and knowledge which I do not dispute, has been leaning in this direction before but certainly early. He suggested that there might be a run on gold back in 2010.
So here we are. They will never admit there is a problem with this, never. They will keep doubling down while the music is playing and if it stops, they will run to the Treasuries and the central banks for a rescue, while keeping their profits and bonuses.
In the absence of enforcement of the rules and effective regulation I am afraid that the only thing that will stop this nonsensical looting is a bullion brick in the face.
The price discovery mechanism in the precious metals market is to hide the true state of the supply behind a wall of secrecy, and to jawbone the demand lower by saying ridiculous things and befuddling the average investors.
But there it is. The flow of gold and silver, a massive exodus of wealth moving from West to East, covered up by a storm of paper.
And the peoples of Asia are letting the malarkey of the bullion Banks and their apologists just float by on the breeze, while they keep stacking the only financial asset without counterparty risk.
As a caution, even if it proves that the highly leveraged LBMA in London, being backed up by the incredibly over-leveraged Comex, is indeed in a developing short squeeze, as Greenspan reminded us, the central banks have gold which they can lease out to their friends in the Banks, so it can be sold off in Asia, with a promise to return it at some future date.
As Sir Eddie George said, they were 'staring at the abyss' if a failure to deliver were to occur, and prompt a run on available gold forcing an unwind of the paper house of cards.
That may keep the books balanced, but it really does not solve the problem, the systemic fraud that is going on in this as it has in so many other markets.
I get the impression that Asia is in this for the long haul, and will not be deterred.
“Our clients will call up saying ‘I hear the Comex is running out of gold, what do you make of it?’ and our quick answer is that this is a non-issue,” Jeffrey Christian, managing director at CPM Group, said in a telephone interview.
“Even if you look at the fact that registered stocks have declined, the fact of the matter is most Comex futures contracts” are cash-settled, and traders don’t take delivery of the metal, he said.
While the percentage of Comex gold open interest covered by total Comex reported stocks has fallen over the past year and a half, it “remains very high by historical standards and presents no perceptible risk of imminent problems with deliveries,” CPM Group said in a report dated Sept. 14...
Barclays Plc said in a report this week that emerging-market demand for gold has shifted some metal into Asia, and that “coverage of physical stocks in Comex remains solid.”
“Anything that has more upside than downside from random events (or certain shocks) is antifragile; the reverse is fragile.”
Nassim Taleb, Antifragile
Gold is anti-fragile. This is why it must be handled with care, and not with fragile systems. Gold is intractable to the kinds of manipulation by the financial system that can bend paper to its will. This is why they hate gold, and seek to paper over it with leverage and secrecy.
Above is a commentary on the physical bullion situation at the Comex as it was reported at Bloomberg News yesterday. The 'deriding', which means ridicule and contempt, is coming from CPM group's Jeff Christian, and from a report from Barclays.
The title of the article is a bit odd, because I have not see any 'theories' about this subject at least here, just presentations of the facts using exchange provided information. And as for deriding, it seems more like a sign of weakness and fear than solid reassurance. But that is just my own experience in seeing that sort of thing when someone points out a changing situation that could pose a problem.
One thing the story fails to make clear is that only registered gold is deemed deliverable to fulfill futures contracts. Yes, all the gold in all the warehouses could potentially satisfy demand, IF IT WAS UP FOR SALE. But it is not.
The total supplies at the Comex have as much to do with the current demand for bullion as all the automobiles in your neighborhood have on the price that you are going to pay tomorrow for a used car, eg. the calculation cannot include items that are not up for sale. Yes there are many cars that would satisfy your requirements. But only those that are for sale are available for you to drive home.
Jeff Christian says that "even if you look at the fact that registered stocks have declined..."
Yes, 'even if' you look at the heart of the argument, 'registered stocks have declined,' and that is quite the understatement of the facts.
Here is the history of 'registered gold bullion' on the Comex going back to 2001.
And of course if almost no one asks for any of the gold, then there is no problem. Yep.
This is the problem. For anything except speculating with paper the Comex is now significantly fragile, moreso than at any time it has been in the last twenty years at least.
Jeff goes on to say that "most Comex futures contracts” are cash-settled, and traders don’t take delivery of the metal,"
And that is correct. Here is the history of deliveries, ignoring any cash settlements, on the exchange.
As should be easy to see, the amount of gold bullion deliveries is declining quite a bit.
The Comex lacks the market discipline of delivery of the goods and restraint on the potential hypothecation of available supply. What is acting to hold leverage to some reasonable level other than 'nothing has broken yet.'
Let's take a quick look at the ratio of total contracts to registered gold, that is gold up for sale.
The Comex is a significant price discovery market for the global gold supply. The data shows that it has diverged significantly from the physical bullion markets primarily in Asia.
While the inventories at the Comex remain flat overall and declining sharply with regard to deliverable bullion, the physical deliveries of gold into India and China are increasing steadily.
And I hasten to remind everyone that gold is truly a global market.
Nick Laird at sharelynx.com has created chart that tracks the known physical gold demand for what he calls 'The Silk Road.'
Even though I do not expect a default at Comex, as I have said many times before, the point is that if there is even a mild problem in one of the physical markets in Asia or London, the Comex is price positioned for a market dislocation and potential fails to deliver bullion on request.
The deliverable gold is a little under 6 tonnes. But even if price were no object, the total gold held in private hands in all the Comex warehouses is about 6,716,000 troy ounces, or roughly 209 tonnes. That is all of it no matter who owns it or why.
Or less than one month's supply for the Silk Road countries.
Normally none of this *should* be problem, although one has to admit that according to historical norms the amount of deliverable gold is very thin by any measure. Why is this? Why are the better informed withdrawing their bullion from the deliverable category? I read that they are afraid of the bullion being caught in a 'short squeeze,' but the trader who said that did not specify a short squeeze where.
This week I learned from an interview with Jim Rickards that some very large bullion banks were said to be using the Comex gold futures to hedge shorts in bullion delivery markets in London, called the LBMA.
That kind of a hedge might work to guard against paper losses, but against a genuine fail to deliver in a physical market you can see that the immediate deliverables at these prices are about 6 tonnes, which is a rounding error on the Silk Road.
It's the fragility, always the fragility.
What if something that is not completely normal and expected happens? What if, instead of 2% of the contracts asking for delivery, a delivery short squeeze in London prompts 4 or 5 percent of the contract holders to attempt to exercise their contracts to receive physical bullion to cover their obligations elsewhere?
The fragility of such an arrangement is bothersome to anyone from outside who looks at it from a systems engineering perspective.
If some firms are using the Comex as a backup system for gold deliveries in London and points east, it is hardly equipped to take that role without a significant market dislocation in price.
If I was only working short term trades and would never mind a settlement in cash, then the Comex seems like a fine place to do the trade.
However, if my goal is to have a solid claim on physical bullion, even within some reasonable length of time measured in several months, it does not appear that the Comex is appropriate for that particular objective.
Do you see the potential problem here that is so blithely 'derided?'
I do not wish to alarm anyone. I am putting out the word because I do not think people understand the situation that has developed, over the past two years in particular, as shown by the potential claims per ounce.
Globally huge market with increasing demand, a market where the available inventories are exceptionally thin, and a price that is derived without a tight rein on leverage and the discipline of delivery. What could possibly go wrong?
The usual retort is 'it has not broken yet.' Yes, and in the light of our experience over the past ten years or so, some might find rather thin comfort in that. The important thing is for traders and investors to be fully informed, that they may use financial instrument in a manner that is appropriate to their objectives.
For example, using Comex as a backup for bullion positions on the LBMA might be fine, if you are not expecting to receive delivery of bullion that can be used to satisfy your obligations there.
The exchange might consider another look at their rules in the light of this unusual 'leverage' of potential claims to bullion, rather than count on price fixing all problems, and few standing for delivery, especially in a changing and very dynamic global market.
I do not have good visibility into the leverage and available inventories at the LBMA in London. If those are in any way similar to the Comex, then I would take some action fairly quickly to secure my ownership of bullion given the potential for a misstep that spins out of bounds.
If you hold an allocated receipt that is as 'good as gold?' Tell that to the investors who used MF Global, and found their holdings sorted out in court against a lawyered up megabank.
I do not know Jeff Christian or the fellow from Barclays. I am sure that they have good reasons for what they are saying and the advice they appear to be giving to their customers. I am sure they can all work out all their concerns and particular issues among themselves.
Objectives amongst customers do vary and it is the fiduciary duty of any advisor to help them make an appropriate choice. And I can see many uses for Comex positions that are entirely suitable for some. A short term trader for instance, who in merely placing wagers that he expects to settle for cash.
But as for this article in Bloomberg, it is a bit of a gloss, heavier on the deriding and short on information for readers to use in making their own informed decisions. 'Trust us' and 'nothing has broken yet' are, as I said previously, non-starters these days.
I have set forth only a few of the oddities that are becoming apparent in the gold market. There are quite a few more, including backwardation and tightness in the London physical market as noted by Peter Hambro and an analyst at Mitsubishi recently, and in articles by Koos Jansen and Ronan Manly.
How about the pivotal London market, is it 'well-supplied?' How well supplied is it? What is the potential impact on the Comex of a bullion shortfall at the LBMA?
Has there ever been a 'stress test' of what it would be like at the Comex if there were an afternoon failure to deliver physical bullion in London? Or are you assuming as your baseline that such a shortfall could never happen in any non-Comex market? Is the process at Comex for some event like that, besides halting the exchange and forcing cash settlements?
I do think that one can become so involved in a system, for so long a period, that when it changes, when the market dynamics start shifting, the old hands may be the last to notice the forest for all those familiar trees. That is why companies bring in quality teams to inspect their processes for soundness and failure points.
What could have possibly changed in the global gold market in the past few years. "Barclays Plc said in a report this week that emerging-market demand for gold has shifted some metal into Asia,"
How about this? Some shift. Some metal.
Here is what Kyle Bass recently had to say about the situation. Maybe you can 'deride' him. Then again, maybe not.
In the light of how the MF Global debacle was sorted out by the courts, and based on a growing body of circumstantial evidence and market indicators, if you are holding your gold bullion 'insurance' in the form of unallocated or opaque holdings, or a hypothecated paper claim in one of the major exchange trading warehouses, you may wish to take measures to safeguard your ownership claims without much delay.
I wrote something overnight, On the LBMA and Their Unallocated Holdings, in which I lay out the case, based on facts and some presumably informed speculation from Jim Rickards, that there is a serious physical shortfall in gold bullion developing that may not resolve as readily as it did in 1999, when the Bank of England presumably bailed out the trading houses.
Commodity backwardation is not all that unusual. But it is somewhat unusual in the precious metals. And in combination with a few other items, it seems worthy of note and some preventative measures.
Koos Jansen notes that gold is now in backwardation in both London and New York.
"Not often in financial markets is the future price of gold is lower than the spot price (live), but lately we’ve witnessed such an event in both the New York and London gold market. This is called backwardation, the opposite of contango.
What causes backwardation and will it increase the price of gold? In my opinion there are two possible scenarios: the market expects the gold price to fall in the future, or there is scarcity now."
Please note that I am not suggesting that you should rush out and take large long positions in gold with the maximum leverage, pile into penny miners hoping for a 'home run'.
I suppose that quite a few will miss this caution since it is not heralded with blaring headlines of imminent doom, but perhaps those who need to hear it will do so. And I am sure that the apologists and the paperati will find their usual ways to dismiss all this, and urge us to ignore all these odd doings in the warehouses. Such are the times.
And I am not ruling out a much larger development behind the scenes with regard to the international monetary regime, that is 'leaking out' from official sources to banking cronies who may act on it ahead of time. But I have no strong indications of that. The IMF seems incapable of resolving the developing monetary crisis because of Anglo-American intransigence.
This is a purely circumstantial case. As was the case that Harry Markopolos presented for years on Bernie Madoff. And it may be wrong, or it may be right and vastly understated. But I think that we have means, motive, and opportunity, and so one may advisably act with caution. And so I have discharged my conscience in not remaining silent while potential trouble looms and the denizens of the markets take care of themselves. It is not so easy a decision to make when you do not have sound evidence because of secrecy and misinformation. And I am sure many will take this, use it as their own, and wrap this in florid headlines and dire predictions of doom.
I suspect at this point that a price correction is still possible as a remedy, but I am not so optimistic to rule out a greater effort to cover it all up that will make things exponentially worse, in the manner of the London Whale and MF Global and LTCM and so many examples of reckless hubris.
There is quite a bit of official interest in bailing out these wanton rich boys from their gambling debts and assorted scrapes, as Sir Eddie George of the Bank of England noted in 1999. And the central banks may rise to the occasion and lease out the people's gold on the cheap to get them out of this one as well. And all under the radar, hush hush. Insiders never speak ill of insiders, or do anything to inhibit the kleptocracy.
"Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise."
Alan Greenspan, Congressional Testimony, July 24, 1998
The denouement of the New York-London Gold Pool is coming, but it may not be here yet. These things tend to drag on and on, wearing most everyone who suspects them out. Lots of people make claims about 'paper markets'. They paper the landscape with them. And if something happens, they will all claim to be the first. The point is to drill down and attempt to assemble the data against determined effort to distort and obfuscate and hide it.
There are people who make calls, and people who make money. I don't make 'calls.' I try to calculate odds, and then take some guidance from the probabilities. There are no sure things in this life, except that we will all meet the same end, and I believe will be called to account for our actions.
Timely caution is advisable, perhaps on a number of fronts.
"The August turbulence in global [equity] markets has produced significant shifts, including a 6.6% fall in equity prices. The currencies of emerging market countries have depreciated substantially against the G-4, while emerging market borrowing rates for sovereigns and corporates [bonds] have moved higher. Global oil prices have been whipsawed as have G-4 bond yields.
The speed and magnitude of these movements is reminiscent of past episodes in which financial crises emerged or the global economy slipped into recession. However, nothing appears to be breaking. Global activity indicators have, on balance, disappointed but remain consistent with a modest pickup in the pace of growth. Additionally, despite the turbulence in financial markets, there is no sign of unusual stress in short-term funding markets or of a credit crisis in any large Emerging Markets economies."
Bruce Kasman, Chief Economist, JP Morgan
So be of good cheer, nothing appears to be breaking, yet.
“The City itself lives on its own myth. Instead of waking up and silently existing, the city people prefer a stubborn and fabricated dream; they do not care to be a part of the night, or to be merely of the world. They have constructed a world outside the world, against the world, a world of mechanical fictions which contemn nature and seek only to use it up, thus preventing it from renewing itself and man.”
Thomas Merton, Raids On The Unspeakable
Here are the current numbers and some recent history on the registered (deliverable) gold bullion inventories held at all of the Comex warehouses in the US. One must view these number within the context of the greater world market for precious metals.
There is much more gold that is privately held in storage in these warehouses that is of an eligible form to be sold if the owner should choose to do so.
Last month JPM was notable for choosing to sell bullion at current prices in large numbers. So I would imagine that as we move into active delivery months that JPM may be worth watching.
It is correct to say that very few contracts for gold bullion in NY actually result in anything more than a speculative trade, some wager. The last I heard only a very small number of contracts, on the order of a few percent, resulted in 'delivery.'
The current total of all registered gold is 182,611 troy ounces, or roughly 5.68 metric tonnes.
There are a total of almost 8 million ounces of eligible gold in all the US Comex Warehouses. I have included that chart at the end. So some will say, 'see, there is more than sufficient gold in the warehouses. This is all nonsense.'
And to that we may respond, yes, but at what price? That gold is presumably private property and not for sale at these prices, except for 182,611 ounces of it.
Anyone who discusses the dynamics of supply and demand in a purportedly 'free market' without even a nodding consideration to the notion of price as a factor is making no sense.
Why show you all this? Some say it means nothing, that I do not understand the markets. Well, perhaps that is true. Then what harm is there in allowing people to see what has happened for themselves.
As you may recall, Goldman was seen taking a large delivery of gold for their house accounts in August. And the amount of gold posted at the Comex 'for sale' at these prices is at historic lows. How can one not wonder at this?
I am certainly not suggesting that there will be hard default at the Comex. How could one expect that in a relatively small market that almost always settles in cash and is dominated by a few, very large insiders who are actively working both sides of the trade? No, if there is a default anywhere, it will precipitate in a physical marketplace where bullion changes hands and form, more likely in London, perhaps even Switzerland. And then it will cascade to all the other markets quickly.
The portion of the gold in London that is not specifically 'spoken for' and held closely is considered to potentially be part of 'the float.'
There have been recent observations by people such as Peter Hambro that it is becoming almost impossible to obtain physical bullion in London at these prices, only endless promises. Even the financial media seems to have realized that there is a tightness in the physical supply of gold.
And yet, with all this the price discovery seems to go on as usual undaunted, divergent from the underlying physical supply issues, except for an increasing leverage of claims to ounces, and backwardation in pricing so that a premium must be paid for actual physical delivery.
This is a very dangerously developing situation, the kind that leads to market dislocations.
There are new calls for the increased 'monetization' of gold, by hypothecating existing bullion to satisfy third party collateral shortfalls. This is a weak form of purchase, a 'rental' that promises to replace what has been further sold, perhaps in multiples, with the product itself being refined into a different format and purity, and then shipped overseas.
And the supply of readily available gold seems to be quietly withdrawing from the markets.
In Hong Kong when you buy gold and take it out of the exchange warehouses it is called a withdrawal.
In other words, you do something with your bullion besides letting it sit around in some exchange warehouse to be passed around and hypothecated 230 times.
The other day at the Hong Kong Comex Metals Exchange 19.17 tonnes of .999 gold kilobars were taken out.
That is about 616,329 troy ounces. Taken out by buyers in a single day. That is a new record for the young exchange.
I hear they have quite a few over-the-counter dealers now, whose mission it is to faciliate the offtake of physical bullion.
Maybe that is why the Comex Hong Kong exchange trading volumes are so low, but the physical offtake levels are so high. They are serious about their business.
Not bad but still not as much as Shanghai does, overall. See the second chart.
It is almost like the New York - London float of unencumbered gold bullion available for delivery is— melting away.
Let us pray for those whose hearts are hardened against His grace and loving kindness by greed, fear, and pride, and the seductive illusion and crushing isolation of evil.
We pray that we all may experience the three great gifts of our Lord's suffering and triumph: repentance, forgiveness, and thankfulness. And in so doing, may we obtain abundant life, and with it the peace that surpasses all understanding.
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