Gold: Delivery or Default?

320
Tue, Apr 23, 2013 - 3:59pm

Jeez, Louise. Where does the time go? It's now 12:08 EDT and I'm just getting started. Where to begin? How do I put all of the stuff that's swimming around in my head into some kind of coherent format?

Primarily, I'm trying to connects these dots with the idea that "history doesn't necessarily repeat but it does rhyme":

  • Strong physical demand
  • Declining Comex reserves
  • The draining of the GLD, with "inventory" now down 18.16% YTD
  • Paper price raids with attendant margin hikes
  • Lease rates and cash vs futures backwardation
  • Bullion bank default
  • You see, I've come to the conclusion that the current situation is far more complicated than I had expected it to be. Rather than a simple sell-stop washout, it seems that there is something considerably more serious lurking just behind the scenes and out of our field of vision.

    Yesterday, I had a conversation with an old friend. He's a sharp guy who has been in financial services industry for over 20 years. He reads this site and has come around to the idea of "market management", not just in the metals but nearly everywhere. He asked me two simple questions:

    1. How? How did the big banks get in this position of being so heavily short?
    2. Why? Why are they heavily short and what are they trying to accomplish?

    Because we were trying to get caught up after after having lost track of each other for several months, I only had the time to answer a part of the two questions...the "why"...and forgetting that, as an industry veteran, he's far more sophisticated than the average person who asks "why". But this got me thinking. In fact, this whole exercise of dot-connecting has been rolling around in my head ever since. I'm typing this up today, not because I've solved the puzzle but because I'm hoping that the sheer exercise of typing will help the thought process.

    So I suppose I should start by revisiting my friend's question. The bullion banks are short for a number of reasons, one of which is this: For the longest time, leasing gold and selling it into the market was free money. You borrowed some gold from the BIS. You sold it at 100:1 leverage on The Comex. You took the cash from the sale and bought something else. Stocks. Bonds. Whatever. And you kept the spread. Pretty simple. And when the time came to repay the leases, you bought some gold back or simply rolled the contracts. As long as physical demand stayed low, you could theoretically play this game ad infinitum. These "bets" got larger and larger and eventually more and more banks joined the fray. And now, in some sense, here we are.

    The banks have leased, hypothecated and rehypothecated just about every ounce of gold that they can get their hands on. And again, from their point of view, all should be well.

    BUT, ALL IS NOT WELL.

    And the problem is...Physical Demand. Again, as stated two paragraphs ago: "As long as physical demand stayed low, you could theoretically play this game ad infinitum". But the jig is up. The cat is out of the bag. The wrench is in the works. And it all goes back to debt and quantitative easing.

    You see, the game is over. The Banks don't want to believe this but you know it's true. I know it's true. Millions worldwide know it's true. High Net Worth individuals trying to protect their assets know it's true. Sovereign Wealth and Pension funds know it's true. And, most importantly, Creditor Nation Central Banks know it's true. All of us are demanding physical gold (and silver) and it is putting incredible strain upon this current, highly-leveraged, fractional reserve bullion banking system.

    So now lets get back to trying to project the future by connecting the dots of the past and present.

    • Strong physical demand. Where do I start? 1000 mts delivered through Shanghai YTD. 15-25 mts allocated and delivered in London each day. Feb13 and April13 Comex contracts totaling deliveries of 2.5 million ounces. Sales records at the U.S. Mint. I could go on and on with links galore but you get the picture.
    • Declining Comex reserves. Registered gold reserves at the Comex have fallen to multi-year lows. As of yesterday, registered reserves were only 2.28 million ounces or enough to settle just 22,800 contracts or 5% of the total open interest. https://www.cmegroup.com/delivery_reports/Gold_Stocks.xls
    • The draining of the GLD, with "inventory" now down 18.16% YTD. As you know, we've been watching this closely and with amusement. Yesterday alone, the GLD shed 18.35 metric tonnes. That's 590,000 troy ounces or 1,475 London bars. Back on April 11, 2013 the GLD had "inventory" of 1,181.42 metric tonnes. As of yesterday, it was just 1,104.71. This means that since the recent paper price beatdown began seven trading days ago, the GLD has shed 76.71 metric tonnes of gold. For all of 2013, a total of 245.21 metric tonnes of gold has egressed from the GLD. That's 7,883,684 troy ounces or 19,709 London bars. (I could C&P all of the pallets necessary to hold these bars but I don't want to crash my servers.) Note the numbers, however. Almost 8MM troy ounces have been withdrawn ytd. As of yesterday, the total Comex warehouse stock of eligible (unallocated, non-deliverable) and registered (available for delivery) gold was just 8,781,909 ounces.
    • Paper price raids with attendant margin hikes. This next link isn't very much fun to read but I ask you to review it, regardless. You'll even find a comment in there from yours truly. (I like the "Franz Ferdinand" analogy...it just didn't work out that way...yet.) In trying to get this point across, though, reading this old story and considering it from the perspective of current events is helpful. Note the date it was written. Think about what happened next. Then think about what has happened over the past two weeks. https://www.zerohedge.com/article/how-comex-lost-20-its-registered-silver-one-week-or-where-theres-smoke-run-theres-probably-r
    • Lease rates and cash vs futures backwardation. Now this is where it gets really interesting. Back in the late 1990s, Gordon Brown ordered the liquidation of a vast amount of English gold. He's since been ridiculed for selling at the low which has subsequently been called "Brown's Bottom". But was he really just blindly and foolishly dumping gold or was there something far more significant taking place behind the scenes? Please stop here and read this: https://fofoa.blogspot.com/2010/07/red-alert-gold-backwardation.html You see, once again the "public story/narrative" is nowhere near the truth. We now know that Brown was actually forced to sell England's gold in order to stave off a bullion bank collapse, a collapse that posed a systemic risk to the global financial system. Gold was delivered for the purpose of covering Goldman Sachs' grossly mismatched leases. Deliveries were made and the system was saved. Physical demand subsided as the dot-com and real estate bubbles were inflated. With the goal of avoiding a repeat of this near-disaster, the banks began to actively manage an ascending gold price in order to keep supply and demand in some sort of equilibrium. It worked pretty well until 2008. It really began to get away from them in 2009, with the advent of overt quantitative easing. Then, in September of 2011, with the U.S. downgrade and the Swiss Franc devaluation, it was decided that price must be crushed (a plan which continues to this day) in the hopes of controlling demand. To the bankers dismay, demand for metal did not decrease. After slowing in 2012, it has increased significantly since the QE∞ announcement last autumn. Crushing price only served to buy time. And now it appears that time has run out.
    • Bullion bank default. Which then brings us to this. About four weeks ago, the Dutch bank, ABN AMRO, declared that it would no longer deliver physical gold to its clients. https://www.zerohedge.com/news/2013-03-24/another-gold-shortage-abn-halt-physical-gold-delivery & https://silverdoctors.com/dutch-bank-abn-amro-halts-physical-gold-delivery/ & https://forexmagnates.com/abn-amro-halts-physical-gold-delivery-another-sign-all-trading-is-simply-for-pieces-of-paper/ Now combine those three articles with these two bits of analysis, written in just the past 24 hours: https://redgreenandblue.org/2013/04/22/james-howard-kunstler-where-the-hell-did-all-the-gold-go/ & https://www.zerohedge.com/contributed/2013-04-22/why-western-banking-cartel’s-gold-and-silver-price-slam-will-backfire-and-how. We also hear anecdotally how both Andrew Maguire and Jim Sinclair know of contacts who have recently been denied delivery of supposed "allocated" gold from their bullion bank accounts: https://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/4/22_Maguire_-_Elaborates_On_The_LBMA_Default_%26_Ensuing_Panic.html & https://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/4/23_Sinclair_-_Swiss_Bank_Just_Refused_To_Give_My_Friend_His_Gold.html

    OK, so now it's 3:08 pm EDT and what have I accomplished. Are the dots connecting? Can we draw any conclusions or even educated guesses as to what might happen next? You know what...I don't know. But I do know this:

    The current situation has many parallels to past events. Is there enough evidence to conclude that the end of the fractional reserve bullion banking system is right around the corner? Perhaps "conclude" is too strong of a word. Put it this way: Is there enough evidence to infer that its a near-term possibility? Yes. Absolutely, yes.

    So what do we need to watch going forward? How about these seven items:

    1. Physical demand. If it begins to wane in the days ahead OR if it declines or ceases after the next price drop, then the banks will likely be able to buy more time.
    2. Lease rates. If the gold lease rate spikes positive like it did in 1999 or how silver did in 2011, you'll know that supply is getting extremely tight.
    3. The CoT structure. Though they haven't been able to pull it off yet, the banks may try to cover shorts to the point of being net long, thereby transferring the "short risk" to the Specs.
    4. Paper price. Do the banks dare rig price even lower, risking an even greater surge of physical demand and an increase in the rate of inventory depletion.
    5. GLD "inventory". Someone in the previous thread made mention of something that FOFOA noted recently. The GLD is down 245 tonnes YTD. It took over two months to "lose" the first 100 tonnes (1/2/13 - 3/7/13). It took about 6 weeks to lose the next 100 tonnes (3/8/13 - 4/16/13). And we have now lost 41 tonnes in the four days since. Will this acceleration continue?
    6. Comex warehouse inventories. They currently hold enough gold to settle and deliver the June and August contracts. Then what? From where will they get their gold to replenish these stocks.
    7. Global tonnage demand. Not through New York but London, Shanghai and Dubai. Does the pace of these allocations and deliveries increase or decrease with price?

    So, I've given you a lot to think about today. (Welcome to my world!) I hope I've left you with the impression that things are extremely complicated at this moment. Far more complicated than what you're being told, where the "mainstream" opinion claims that gold is declining because of a lack of global inflation or the sunny prospects of economic growth. That analysis seems a little shallow now, don't you think?

    To me it seems that the banks have once again walked the world to the precipice. If physical demand continues unabated, the fractional reserve bullion banking system will likely collapse as member firms and exchanges are eventually forced to default. Rest assured, we'll keep our eyes wide open, looking for additional clues and warning signs. For now, though, just continue to practice your primary safety drill: Buy metal, take delivery and add it to your stack. While you still can.

    TF

    About the Author

    Founder
    tfmetalsreport [at] gmail [dot] com ()

      320 Comments

      Refresh
    Watcher
    Apr 25, 2013 - 8:27am

    400 oz. bars

    Santa tells it like it is today:

    Sinclair - This Is The Beginning Of The End For The Gold Shorts April 25, 2013 Today legendary trader Jim Sinclair told King World News that, despite the volatility, what we are witnessing is the beginning of the end for the gold shorts. Below is what Sinclair, who was once called on by former Fed Chairman Paul Volcker to assist during a Wall Street crisis, had to say in this... Read more... |
    SilverSurfers
    Apr 25, 2013 - 7:41am

    hunta this

    Max Keiser rhetoric stems from 3 sigma type brain power, and, love, and he just goes off, big time, episode after episode, but made a curious analogy between a ruling hunta and the troika, (EU, ECB, IMF) saying a hunta just occupies, but the trioka is out to decimate most of the population for the 1%ers, hence, comparing evil v evil, and errors on side of mankind, less misery and survival, etc with a hunta. Got to love Max, he is so so so close to answering the big why, going global with his kind of thumping and seems concerned about his fellow man, centered in freedom. Yeah, his bit coin flows from impatience, flows from losing a battle, currently, in our time, with TPTB, but nonetheless is a real money believer and freedom lover, opposing fiat money and totalitarian rule, in our time, and is probably a closest trudite, invited to the back page.

    contacted directly with only a copy of this post. keiserreport[at]rttv[dot]ru

    jezfry
    Apr 25, 2013 - 4:39am

    Not a sell stop washout

    We can safely assume that all the shorts placed by the bullion banks in the recent past are now in profit. Whilst there hasn't been an immediate bounce back in price as speculated we now know this is because they haven't yet covered. But why would they? If they can cover on a drip, drip basis and keep the price subdued for a while longer and disorientate a few more longs in the process - this must surely be part of their rationale?

    It has all the hallmarks of a last ditch desperate attempt which will fail when physical demand at these low prices overwhelms the market. At that point - which seems to be imminent - the snap back rally will begin.

    I'm interested to see the 'headline' or changing narrative in the MSM that explains the rally - when it appears or we read something that will 'justify' an imminent rally then that will be the starting gun.

    Byzantium
    Apr 24, 2013 - 7:06pm

    hold on

    The stakes of this bet were changed before they were accepted. I objected that an ounce of gold was too much so I think we set it at $100. I'm not sure but I think that's right. I'll have to go back and check.

    Byzantium
    Apr 24, 2013 - 6:52pm

    Speaking of Jeanne...

    your bet with her Turd, was which would perform better in 2013; gold or stocks. The loser pays the equivalent of one gold ounce to charity. The year is young yet; I think that the odds favour you on that one.

    Your $22 hat eating bet must have been with somebody else.

    I hope you are keeping a register of all your bets!

    SE
    Apr 24, 2013 - 5:51pm

    Apparently not

    Apparently not

    SilverSurfers
    Apr 24, 2013 - 5:14pm

    Specialty III

    previous 4 posts above, specialty II, addendum thereto:

    So, when a mere troll is surfing the web, mere bait, and there are millions of them, they will see that stupid big yellow hat, like its really is in your face, for a huge EYE CATCHER, that is marketing without an advertisement, just for free, continuously, the big set up complete, with the rocket jocks armed to the teeth for the shoot-out, well versed, and I tell you, they are ready, locked and loaded, to pounce on anyone so snared lured in by that continuous free advertisement, for yet still a further BRAVO.

    Then comes recognition of the word TURD, as the haluciagin takes hold, and that we got them is softy heard by the hunters, he enters, the lure compete, the exterior mind spinning by then as any captured prey would be, ready to unkowningly enter the devil's den, full of rocket jocks, armed to the teeth, with many quips no doubt memorized, ready and waiting for the shoot at the OK, the prey is cornered, then blastoff, cross-fire, missiles and bullets everywhere, of course, pity comes to mind for any would be troll or kensyanian just surfing, just look at the previous post where "damn it" is used, as prey are snared when entering hell, they got no clue, like they just stepped into it, with turdville guns locked and loaded, all patiently waiting for the next snare, on a regular basis, as each new daily post is a tempting reset of the snare, first herald by twitter, building the choir, regular likes, for still another BRAVO.

    The more thought is had on the subject, the more impressively it becomes, clearly, a master is at hand, doing the JEDI mind tricks, free advertising, casting out the web particularly for and on these poor poor trolls and lookieloos who have no clue. SWEET!!!! GOT EM!! LMAO!! as hook-up hook-up clearly but softly echoes to pass the word of one caught, and when a few rounds go off by the locked and loaded, loaded for bear, responsive to the first tentative posts, then look out baby, as all hell cuts loose, in turdville, to build the choir. This is such a great site, no other like it, honestly, its just precious.

    Sincerely Yours and Most Respectfully

    It is an honor to be your obedient servant.

    Visit the FAQ page to learn how to track your last read comment, add images, embed videos, tweets, and animated gifs, and more.

    SE
    Apr 24, 2013 - 4:58pm

    Mwahahahahahaaa...

    Some folks asked that I provide proof. I wrote the following in July last year:

    --------------------

    "Jeanne, you're skating on thin ice here, especially because you've devoted a good portion of webspace on your competing blog towards bashing Turd. And the thing is, we don't know who the hell you are. What's your real name? Who's behind you? You've got a blog, on Blogspot, so it's not easy to track your domain, written by the following contributors, none of whom are real people:"

    Yeah, JDA... Who the HELL are you? How come I never heard of you before today? I've heard of Screwtape for about 13 months now. Where was Screwtape before THAT? I never heard of you all in the years before when I was researching the works of Chris Powell, Ted Butler, and several others, since 2005. Do you know ANYTHING about Hindu culture and its affinity for gold/silver as well as its real-world experience in government inflation in India? How about China's affinity for silver? And the rest of Asia in regards to gold/silver? ESPECIALLY the middle east?

    So far, I called correctly that silver was going to be taken down big time for some time before May 2011. After all, look at the chart prior to that date. Going up too fast, too soon. I have been able to time my silver purchases to happen after a crash. And I'm still calling that silver may start getting out of the $30-35 at the END OF THE YEAR, no earlier. In fact, it might not happen until next year, and I wouldn't be surprised if it doesn't go over $50 until May of *** 2014 *** . Look at a 10-year chart of silver to see the intermediate-term cyclical pattern of a peak about every 2-3 years.

    I fully accept the possibility that silver may hit $23 or even lower before it takes off again, simply because people who "invest in gold and silver" as an investment only look at it as an asset to be used to cover margin calls and losses in the paper markets, like last time in 2008. They still do not look at it as money. If they did, 1) they would not be owning paper assets, never mind on a margined basis, and 2) they would be buying gold/silver every time a crash happened, not selling it. I BUY silver every time a crash happens. I do not allow myself to be in a position where I have to take a loss such that I have to sell silver to cover it. Just so you know, I am NOT a trader, nor do I have any intention of becoming one, because I do not want people in post-collapse America hunting for me as a contributor of its collapse.

    JDA, you appear to be VERY new at this, as your actions do not reveal a depth of knowledge about the silver markets, nor about how the world really works.

    ----------------------------

    Oh, don't believe me? https://www.tfmetalsreport.com/comment/108498#comment-108498

    Please note that silver is trading around $23. Not 21 not 24. $23. Am I crazy, Turd?

    tmosleytpbeta
    Apr 24, 2013 - 4:07pm

    tpbeta, YOU are the one who

    tpbeta, YOU are the one who wanted to talk about Austrian Economics NOT ME. That is not MY definition of inflation, that is the AUSTRIAN definition of inflation. YOU DON'T KNOW WHAT YOU ARE TALKING ABOUT. Just admit it. That isn't to say that Austrians or Keynesians or any other school of economics are right or wrong, it's just that you don't know what Austrian economics is, as you failed every lesson given you, and you can't discuss the most basic positions of said school.

    Also, you get a zero for lesson two. Keep it up, and you'll be kept back a grade.

    Edit: I should add that if you don't like the abuse, then stop pretending like you are an expert on things you clearly know nothing about. Or you can just go away and never return. I promise I won't follow you and keep pointing out your numerous inadequacies.

    Subscribe or login to read all comments.

    Contribute

    Donate Shop

    Get Your Subscriber Benefits

    Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

    Key Economic Events Week of 9/21

    9/21 8:00 ET Goon Kaplan
    9/21 10:00 ET Goon Evans
    9/21 Noon ET Goon Brainard
    9/21 6:00 pm ET Goon Williams & Goon Bostic
    9/22 10:30 ET Chief Goon Powell on Capitol Hill
    9/22 Noon ET Goon Barkin
    9/22 3:00 pm ET Goon Bostic again
    9/23 9:00 ET Goon Mester
    9/23 9:45 ET Markit flash PMIs for September
    9/23 10:00 ET Chief Goon Powell on Capitol Hill
    9/23 11:00 ET Goon Evans again
    9/23 Noon ET Goon Rosengren
    9/24 1:00 pm ET Goon Bostic #3
    9/24 2:00 pm ET Goon Quarles
    9/24 10:00 ET Chief Goon Powell on Capitol Hill
    9/24 Noon ET Goon Bullard
    9/24 1:00 pm ET Goon Barkin again & Goon Evans #3
    9/24 2:00 pm ET Goon Bostic #4
    9/25 8:30 ET Durable Goods
    9/25 11:00 ET Goon Evans #4
    9/25 3:00 pm ET Goon Williams again

    Key Economic Events Week of 9/14

    9/15 8:30 ET Empire State and Import Price Idx
    9/15 9:15 ET Cap Ute and Ind Prod
    9/16 8:30 ET Retail Sales
    9/16 10:00 ET Business Inventories
    9/16 2:00 ET FOMC Fedlines
    9/16 2:30 ET Powell Presser
    9/17 8:30 ET Philly Fed
    9/18 8:30 ET Current Acct Deficit

    Key Economic Events Week of 9/7

    9/9 10:00 ET JOLTS job openings
    9/10 8:30 ET Initial jobless claims
    9/10 8:30 ET PPI
    9/10 10:00 ET Wholesale Inventories
    9/11 8:30 ET CPI
    9/11 9:45 ET Core CPI

    Key Economic Events Week of 8/31

    9/1 9:45 ET Markit Manu Index
    9/1 10:00 ET ISM Manu Index
    9/1 10:00 ET Construction Spending
    9/2 8:15 ET ADP employment
    9/2 10:00 ET Goon Williams
    9/2 10:00 ET Factory Orders
    9/3 8:30 ET Initial jobless claims
    9/3 8:30 ET Trade Deficit
    9/3 12:30 ET Goon Evans
    9/4 8:30 ET BLSBS

    Key Economic Events Week of 8/24

    8/24 8:30 ET Chicago Fed Idx
    8/25 10:00 ET Consumer Confidence
    8/26 8:30 ET Durable Goods
    8/27 8:30 ET Q2 GDP 2nd guess
    8/27 9:10 ET Chief Goon Powell Jackson Hole
    8/28 8:30 ET Pers Inc and Consumer Spend
    8/28 8:30 ET Core Inflation
    8/28 9:45 ET Chicago PMI

    Key Economic Events Week of 8/17

    8/17 8:30 ET Empire State Manu Idx
    8/17 Noon ET Goon Bostic
    8/18 8:30 ET Housing Starts
    8/19 2:00 pm ET July FOMC minutes
    8/20 8:30 ET Jobless claims
    8/20 8:30 ET Philly Fed
    8/20 10:00 ET LEIII
    8/21 9:45 ET Markit flash PMIs July

    Key Economic Events Week of 8/10

    8/10 10:00 ET Job openings
    8/11 8:30 ET Producer Price Idx
    8/12 8:30 ET Consumer Price Idx
    8/13 8:30 ET Initial jobless claims
    8/13 8:30 ET Import Price Idx
    8/14 8:30 ET Retail Sales
    8/14 8:30 ET Productivity & Unit Labor Costs
    8/14 8:30 ET Cap Ute and Ind Prod
    8/14 10:00 ET Business Inventories

    Key Economic Events Week of 8/3

    8/3 9:45 ET Markit Manu PMI July
    8/3 10:00 ET ISM Manu PMI July
    8/3 10:00 ET Construction Spending
    8/4 10:00 ET Factory Orders
    8/5 8:15 ET ADP employment July
    8/5 9:45 ET Markit Service PMI
    8/5 10:00 ET ISM Service PMI
    8/6 8:30 ET Initial jobless claims
    8/7 8:30 ET BLSBS for July
    8/7 10:00 ET Wholesale Inventories

    Key Economic Events Week of 7/27

    7/27 8:30 ET Durable Goods
    7/28 9:00 ET Case-Shiller home prices
    7/29 8:30 ET Advance trade in goods
    7/29 2:00 ET FOMC Fedlines
    7/29 2:30 ET CGP presser
    7/30 8:30 ET Q2 GDP first guess
    7/31 8:30 ET Personal Income and Spending
    7/31 8:30 ET Core inflation
    7/31 9:45 ET Chicago PMI

    Key Economic Events Week of 7/20

    7/21 8:30 ET Chicago Fed
    7/21 2:00 ET Senate vote on Judy Shelton
    7/22 10:00 ET Existing home sales
    7/23 8:30 ET Jobless claims
    7/23 10:00 ET Leading Economic Indicators
    7/24 9:45 ET Markit flash PMIs for July

    Forum Discussion

    by Wizdum, 7 min 17 sec ago
    by Green Lantern, Sep 20, 2020 - 8:36pm
    by Trail Trekker, Sep 20, 2020 - 7:35pm
    by Alembic, Sep 20, 2020 - 7:31pm