Option Expiration Day For Precious Metals on the Comex

On Tuesday I wrote:

"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."

Jesse, Cafe Americain June 22

And so we saw gold push lower, and then rally higher sharply afterwards, especially today.

Fait accompli.

This might be overlooked in the recent posts about the potential shortage of bullion that appears to be occurring, centered on the physical market in London.

Higher prices may provide a cure, but they need to be stable higher prices to free up bullion held in strong hands.

Don't think for a minute that this is a 'square' market now.   The Bucket Shop is in a virtual bullion lockdown and the paper trade is alive and well.

They can expand leverage freely given the craven silence of the regulators and professional courtesy amongst the looting class.

But they cannot create more physical bullion, and therein lies their limits.

Nick Laird: The London Gold Float Is Running Unusually Low

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."

Read the entire analysis with charts at The London Float.

Related: Shrinking Supply of Available Gold In London For World Demand

Gold Daily and Silver Weekly Charts - Blithely Deriding Into The Sunset: Du Calme, Du Calme, Adieu

“We are in a world of irredeemable paper money — a state of affairs unprecedented in history.”

John Exter

It may be unprecedented, but it certainly seems to be comfortable to the one percent and their courtiers, so that they are eager to let it run unfettered, and call it 'the new normal.'

There was significant intraday commentary regarding gold and silver to read if you have not done so already.

And I would especially urge you to have a look at the first of these.  It may seem complex at a glance, but much of that is support for the first few paragraphs.

Surprisingly Tight Supply of Available Gold in London Compared to Ongoing World Demand 
and
Physical Tightness in the Flow of Gold Is Reflected in the Price 'Not At All'

There was also some overnight commentary Premiums for Silver Coins Continue Running Much Higher than Spot

We might wonder when these fellows will let it go, and no longer attempt to control that intractable store of wealth that bears no counterparty risk.

The effort to quantify the disposition of the gold in the London Vaults was designed to try and calculate the depth of their discretionary supply.  The demand or 'burn rate' is fairly well known although probably a bit light because of the People's Bank of China's propensities to acquire bullion discreetly.

The objective is obviously to determine just how much float they have to support the demands in excess of scrap and mining and leasing.

And then the gold market 'gets real.'  

Nick thinks maybe four to six months.  I give them a sporting chance to make it through year end and then tumble into visible difficulties mid next year unless the market dynamics change dramatically or they relent on their interminable price capping.

Better to let the market clear than carry on with some obtuse extend and pretend program until the gold pool falls apart.  They do tend to do that over time.  Always.

I have little hope that they will do the right thing now, having failed to do what is just in so many other things before.  But perhaps cooler heads will prevail.

There was very little delivery at The Bucket Shop yesterday and only the usual slow bleed of bullion out of silver.   Gold is acting like it is in a lockdown .

Below there is large diagram diagram is John Exter's inverted pyramid of monetary risk.

For a balanced portfolio you may wish to include something from the narrower base of the pyramid.

Have a pleasant evening.


You will find the commentary that supports this next slide in the first link above or here.

SP 500 and NDX Futures Daily Charts - Weekday At Bernies

Stocks were roiled overnight by some rather bad economic data overnight and the SP 500 futures were sagging noticeably.

And then around 4:47 AM NY time, which alas I was still awake working to see, the futures mysteriously started rallying higher.

No mystery there to me.  The Robert Rubin principle as Treasury Secretary in the 1990's was to encourage some entity to buy the futures to lead the market, rather than stepping in later to clean up the aftermath.  I am not sure he meant that one should do this so frequently however.

So what.  If only these jokers would do something constructive about helping the real economy, rather than throwing dust clouds over the corruption and lack of reform.

But they are, after all, caught in a credibility trap, and besides, they and their cronies are winning...

Have a pleasant evening.

Shrinking Supply of Available Gold In London For World Demand - Timely Caution

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.


Related:
On the LBMA and Their Unallocated Holdings
Lions and Tigers and Deriding the Tightness of Gold Supply
How Many Good Delivery Bars Are In the London Vaults - Ronan Manly
Central Bank Gold at the Bank of England - Ronan Manly* (detailed sourcing of this data)
The London Bullion Market and International Gold Trade - Koos Jansen
Detailed London Charts and much data gathering - Nick Laird (available to the public)

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.

Swiss Refiner: Physical Tightness in the Flow of Gold Is 'Reflected in the Price Not at All

"No correlation to the physical market.

On-going tightness in the physical gold markets.

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.