Nova Scotia Apparently Backing the Meager Action in Comex Gold - Gresham's Law

Gresham's law is an economic principle that states that when an official market or cartel overvalues one type of money or asset and undervalues another with respect to its fair market value and risks, the undervalued money or asset will leave the country as best it can, or will disappear from circulation into hoards, while the overvalued money or assets will flood into circulation.

Let me stipulate up front that when it comes to the global gold market, the Comex has actual gold flows that are so meager compared to the amount of trading which occurs on paper that I have said it is starting to look like The Bucket Shop.

And in recognition to the disclaimer statement that appears on all of their documents, the exchange makes no claims and accept no liability that any of these numbers are accurate. They are taking the originators of these numbers at their word, some of which are Banks which have recently been shown to be serial offenders when it comes to their financial dealings, pricing, and representations.

As of Wednesday, only 171,613 ounces (5.13 tonnes) were 'up for delivery.'   In a global market where the daily deliveries are measured in metric tonnes, that is a very small amount.

In terms of overall active Comex contracts, that represents a paper to physical leverage of roughly 263 to 1, compared to a historic trend of about 24:1.

And as I looked things over, I was struck by the fact that of those meager ounces available, 101,312 (3.2 tonnes) were from the vaults of Nova Scotia, or roughly 60% of the total.

That struck a chord in my memory, so I looked over the list of deliveries for the month of October.

Of the pathetically small amount of 240 contracts, or 24,000 ounces (.75 tonnes) delivered in the entire month, 17,600 have come from the 'house account' at Nova Scotia.

And the 'takers' of those few ounces have been the 'house accounts' at JP Morgan and HSBC.

So what I am trying to prove with all this?  Nothing.   I am merely showing an interesting trend change that has gone largely overlooked, except in some notable exceptions of the 'smart money.'

And I am documenting some facts for those who have a mind to see them, and to establish a record that people can refer to when these jokers blow up yet another market through their reckless obsession with gambling large.

It shows that in a world of global gold flows, very little is moving in the Comex warehouses, and the little that is changing hands seems to be moving between the houses of three of the big bullion banks.

And it tend to support a hypothesis that the gold trading in London and New York has taken on the character of currency crosses, and lost their ties to the physical commodity nature of the product.  This divergence may be convenient for the management of the price, and for easy profits for those managing the game.

But it has longer term consequences which will eventually come back to shock the markets.  Where have we seen these types of divergences among risk, valuation, and the underlying realities before?  In just about every financial fraud and following crisis in the modern era at least.

So remember this when the next crisis comes, and the distraction, dissimulation, and duplicities are put forward, and the search for non-consequential scapegoats is underway. And you are expected to bail out these jokers once again 'to save the system.'

I am fairly confident that all of this will come to pass if things do not change, and serious reform and enforcement of the rules of the markets are not undertaken.  So far the changes we have are largely cosmetic.  In a plutocracy big money manages the government and the media;  they have bought and paid for it.  And eliminating government only serves to eliminate the middleman.  Transparency and reform are the only sustainable answer.

The big action in the precious metal bullion markets is in Asia.

And gold and silver bullion are steadily flowing from West to East because of a mispricing of valuation and risks.   And the reason for the stunning drop in physical trading activity in the West is because in a manifestation of Gresham's Law,  the hypothecated paper metals are driving out the bullion out of the market.

This is a trend, and it has significance to those who are willing to see it.

Comex Registered Gold Inventories - 'Deliverable Gold' At Current Prices

As someone asked, since hardly anyone is buying gold on the Comex and taking it out, why would be concerned about any inventory levels of deliverable gold?

Indeed, why be concerned about price if it is just all a part of an extended game of liar's poker between speculative interests?

It is almost just a betting parlor now, hence the title The Bucket Shop.

However, that does call into question its role in price discovery in the global trade around the world, much if not most of which is physical.

And that price discovery in London at the LBMA is asserted almost every day in one of the clearest patterns of price manipulation that one might even try to imagine.

As I have said on a number of occasions, I am not looking for a 'default' in NY.   How can one default when forced settlements in cash can be easily accomodated at the Fed's window at any time?

No, the first cracks in the facade of the modern Gold Pool will appear in a key node of the physical market, most likely in London or Switzerland as fails to deliver.  Perhaps even in Shanghai.

However, like the ebbing of the tide, a ready supply of gold for delivery will likely start disappearing from the shelves around the world at both the wholesale and retail level as the vortex of actual delivery in Asia consumes the ready supply at current prices.  The cost of 'borrowing' gold will increase dramatically as the risk of a counterparty failure to return the bullion will intensify.

There will be a divergence between the price for immediate delivery of bullion and the paper price in the future, until the discrepancy becomes so obvious that there is a 'run' on the available short term physical supply, and real gold bullion goes to 'none offered' at any price close to the 'price discovery' of the paper markets.  And then there will be a halt, a settling, and a reset.

If the source where you hold your bullion does not offer a guarantee of the bullion itself, rather than the 'value of the bullion' then chances are unacceptably high that you will be force settled in cash prior to a reset of the price substantially higher.

This is what happened in the US in 1933 when the official gold currency in circulation was recalled.   People who had gold stored in the Banks had their monetary gold taken,  a paper payment was received for it at the official price, and then afterwards the price of bullion in US dollars was set 41% higher.  The increase in reserves was used to help prop up the insolvent banking sector.

Although such an action today is less likely since gold is no longer a monetary metal with a claim from the state, nevertheless such an action in a force majeure breakdown in the financial system whereby borrowed and 'shared' gold could not be returned at the current price faces a similar fate.  This is how the failure of MF Global was recently resolved, and I can easily see the same rules applying for a market break in any leveraged system of ownership.

Related:  Why the Federal Government Seized Gold In 1933

JP Morgan Saves the Day With a 275,000 Ounce Gold Fill On the Comex

When I saw the CME gold report from yesterday I was a little surprised to see that over 300,000 ounces of gold in futures contracts were stopped, or taken for delivery, so far in August.  And there was a total request for 282,000 ounces just yesterday.

Since there were only 362,000 ounces offered, I was wondering how they would manage this.  Claims to deliverable ounces were still running over 120:1.

 

And just for grins, where were the biggest requests for gold coming from?  None other than the house accounts of Goldman and HSBC.  What's up with that?

Have no fear, JP Morgan stepped up and moved 276,000 ounces into the 'deliverable' category as show in the second chart. 

 

And they filled 275,000 ounces of that futures delivery request out of their 'house account' as shown in the first.

 

Just in the nick of time!

 

The dirty little secret is that this market is a tiny tail wagging an elephant of global physical demand.   And the tail waggers seem to be slowly, but surely, losing their grip.

 

Comex Registered 'Deliverable' Gold Bullion Stores - Money Is All About Power To Some

"The conventional wisdom seems to be that the problems of the euro zone are, as economist Martin Feldstein once put it, 'the inevitable consequence of imposing a single currency on a very heterogeneous group of countries.'

What this commentary gets wrong, however, is that single currencies are never the product of debates about optimal economic solutions. Instead, currencies like the U.S. dollar itself are the result of political battles, where motivated actors try to centralize power.

This has most often occurred 'through iron and blood,' as Otto van Bismarck, the unifier of Germany put it, as a result of catastrophic wars. Smaller geographic units were brought together to build the modern nation state, with a unified fiscal system, a common national language that was often imposed by force, a unified legal system, and, a single currency. Put differently, war makes the state, and the state makes the currency....

European leaders weren’t stupid or self indulgent when they decided to move ahead with the euro, without fiscal union or strong Europe-level democracy. They just cared more about politics and international security than economics. They wanted to build a Europe that had transcended the divisions of the Cold War, and bind together Germany, which was reunited and much more powerful, with the rest of Europe."

Kathleen McNamara, This is what economists don’t understand about the euro crisis – or the U.S. dollar

Why is it that 'great people' always seem compelled to build their dreams of empire on the backs and broken bodies of innocents.  As always, it is for the greater good, and there will be collateral damage.

I do think some of the things that McNamara says is just a rationale for a certain philosophy of government.  The historical example of the US is almost embarrassing, revisionist, especially when she discusses the civil war, and how aimless the US had been until the creation of the Federal Reserve in 1913.

But it serves the hypothesis that the ends of pursuing 'order' justify the means including the overthrow of freedom, and that this is the lesson from history.  It certainly is a lesson, but I am not sure it is the one that she intends.

Money is indeed a medium of exchange, and a store of value. And it can also be a means of power, if it is abused and distorted to serve selfish ends.   We certainly have seen enough of that sort of thing in the first fifteen years of this century, with bailouts, and selective justice, and the abuse of regulation and monetary policy to favor a few over the many.

According to this line of thought, those who foresaw the pitfalls of the euro wanted nevertheless proceed in order to foster a unified political system which they felt would be more orderly, controlled by a collection of technocrats.

There is a similar school of thought with regard to a single world currency like the US dollar for example, that is to be controlled centrally by a cadre of technocrats that will be able to bring order, if not freedom, to everyone.   And somehow these benevolent technocrats always turn out to be merely human.  And then with time something less, much less.

After all, we must have order.  And in establishing that order, there must be collateral damage. Like Greece.

Have we forgotten the long line of thought that money and the banking system are utilities, that were put in place under state charter and regulated to provide for their function within a greater, productive economy in order to serve the public good?  And not as a tool of power and oppression by a privileged few?

Is this not the message one receives in reading of the law, and the long history of thought from the founders to the New Deal, with the usual digressions and abuses of monopoly power that will use a variety of means, including finances?  And not as an instrument primarily of state power and control over the people.

The central hypothesis of Professor McNamara seems to be that money, like most other things, is primariily an instrument of power, and that the deployment of the euro is an exercise in the centralization of power over a heterogeneous collection of nations and economies, and a means to bring Germany to its natural place at the head of a United Europe.

I am not saying that this view of public finances, banking and money as instruments of power is the intention or perspective of all economists.  Such a view of monetary theory exists as a willful distortion and abuse of economics, fostered by hubris and the will to power.

"What is good? All that enhances the feeling of power, the will to power, and the power itself in man. What is bad? All that proceeds from weakness. What is happiness? The feeling that power is increasing--that resistance has been overcome. Not contentment, but more power; not peace at any price, but war; not virtue, but competence."

Friedrich Nietzsche

It is a perspective that is shared by some of the powerful and the privileged.  It is just not normally associated with popular or democratic governments.   Just as other public utilities like the police are not intended as a force used to terrorize the people and quell any dissent, or the judiciary exists to permit and facilitate the abuses of a privileged few, while serving as an instrument of oppression over the general populace.  Such things can and do occur.  But these are aberrations, and not the norm, except in a society that has lost its conscience and moral moorings.

It is ironic that McNamara is a Professor of Government and Foreign Service at Georgetown, Carroll Quigley's old university.  I am not familiar with her body of work, and so admit I may be construing what she has written about the European Monetary Union, or was even being satirical.  But what she says calls to mind the writings of another Georgetown professor Carroll Quigley who, as you may recall, was Bill Clinton's mentor, and sponsor for his Rhodes Scholarship.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences."

Carroll Quigley, Tragedy and Hope, 1966

As old as Babylon— or Babel.

The amount of gold deliverable at these prices at the Comex seems to be a bit thin by historical standards. 

Comex Gold Rises To A Near Record 107.7 Claims Per Registered Ounce

Well, here we are again.

As you may have noticed from my postings of the Comex Warehouse Gold inventories, lately there has been a significant drop in the level of 'registered' or deliverable gold held there.  And since the open interest or number of contract held by punters and investors is not dropping commensurately, the number of claims per deliverable ounce has risen.  Quite a bit actually.

As a snarky observer pointed out, somewhat presumptuously I thought, there is quite a bit of other gold stored in these warehouses.   It is called 'eligible' gold meaning that it is in the proper format for Comex trading. 

But, I retort, that which is not marked registered is not available for delivery at these prices, unless the owners change their minds.  Or the Comex starts confiscating private gold in storage. And I sincerely doubt they  follow the MF Global method of customer metals inventory management.  Although no on has yet to  pay the price for that one. 

Then again, ownership is a flexible concept in The Grift, which is what the US financial system has become.   And the exchanges are its Bucket Shops.

This can very well resolve itself neatly as it did last time, especially if a friendly possessor of physical gold, let's say a bullion bank or an official non-profit seeking agency like the IMF or the odd money printing central bank decided to lease or deliver some of their physical holdings into the market without regard to price and profit.

Then again, the players might decide to just roll over their contracts and claim checks and just keep the game rolling, taking the rigging skim from related markets and the vig.  This is perfectly acceptable behavior for The Bucket Shop.  It seems to be the new thing for stocks and even bonds as well.   Its a derivative universe.

Or, God forbid, the price of gold could rise to increase the available supply.  But that is very retro economics, certainly not modern, and so yesterday.

Musical chairs with only a limited number of seats is not a problem, if the music never stops and no one tries to sit down.  It's all just a game in The Grift.  And if they ever go cashless and purely electronic, it will be a brave new world of modern money.  Whoops, another bailout, and there went half your savings!   You won't even have to play to pay. 

So let's see what tune the carnival plays on this go round.  And a pleasant time is guaranteed for few, just a few.

These charts are from Nick Laird at sharelynx.com.

Potential Owners Per Ounce of Registered Comex Gold Back Over 50

Please note that this is not all the gold in Comex warehouses, merely that gold which is marked as deliverable at these prices.

Some like to use all the gold in their calculations but that seems a bit presumptuous, to consider gold merely being held by customers in storage in one of those warehouses as fair game at any price.

I am not calculating this for the purposes of a default, as you may recall.  The open interest is only potential owners. The Comex is, after all, a largely paper market.  

If there is a physical default it will more likely happen overseas, and come cascading back to London and New York, and the exchanges go bids up, with none offered.

In a case like that they can force settle in cash for paper, maybe, but not for the real thing.

Let's hope the imbalances between price, demand, and supply do not grow to the level.

Gold Daily and Silver Weekly Charts - Audacious Oligarchy - Ten Tonnes of Gold Taken Out of JPM

"When, O Catiline, do you mean to cease abusing our patience? How long is that madness of yours still to mock us? When is there to be an end of that unbridled audacity of yours, swaggering about as it does now?

Marcus Tullius Cicero,  In Catilinam I

There was little of note in the Comex delivery report but there was a sizable withdrawal of gold reported from storage at the JP Morgan warehouse, about a third of the total at ten tonnes.   Let's see if that turns up anywhere, or is another fat finger.   An individual event is of less matter than the significance of the trend.  And the trends are apparent.

Wall Street is drawing pictures on the Comex price charts, and there are those who will keep their heads down and continue to read them as if it is business as usual.  They will not look at the reports from the new markets in Asia.  They will ignore the uncomfortable and the unfamiliar.  They are oblivious to the approach of change.  Quite a few do not look at all.

They do not understand what is occurring in the world's financial and monetary structures. They only know what they have seen in their short lifetimes, and in their familiar places.  And they often do not respect what they do not understand.  Well, this is what makes a market interesting.

Gold is moving from West to East.  And therein lies both risks and opportunity, to those who will have an eye willing to see it.

There is a Comex option expiration next Tuesday the 28th, and an FOMC rate decision on the 29th.  It might be a hard week for the metals bulls. 

Let's see what happens.

Have a pleasant evening.

Comex Silver Stockpiles at the End of 2Q 2014 - Coins 'N Things

As you know July is an active month for silver futures contracts at the Comex.

On paper at least, the Comex warehouses seem to be well stocked, with two relative newcomers CNT and JPM having built up some significant stockpiles.  I was particularly taken with CNT.

I have broken out the registered (deliverable) from the total inventory in the second chart to show that while there is quite a bit of inventory on hand, only a modest portion of that is 'for sale' at these current prices.  And a big chunk of that is held at CNT, a privately held family business in Massachusetts that grew from a single coin shop called Coins 'N Things.  

CNT has become the largest wholesaler of gold and silver to the US government and has become a major reseller of American Silver Eagles.  The company does not report its numbers and has no outside investors. 

 

I wonder if they are subject to regulatory oversight or independent audits of any sort.  Presumable Comex applies the same blanket disavowal of liability to silver as they do to gold in their authorized warehouses.

I don't think it is an overstatement to say that the near term deliverable silver market at the Comex is systemically dependent on CNT.  An unfortunate event or a misstep at that relatively small company, or a major failure by one of their counterparties, would quite possibly trigger a silver market dislocation of sorts.  And I would not rule out a declaration of force majeure. 

 

This is not to say that it will happen, but rather that from a systems perspective that this is a major single point of potential failure with significant cascading results.  It points to a locus of potential fragility.

These graphs are from the Data Wrangler from Down Under, Nick Laird at Sharelynx.com.