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

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      320 Comments

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    AlexCojones
    Apr 23, 2013 - 11:32pm

    Quote of the Day - from KWN

    "Hedge fund manager William Kaye told King World News that the central planners’ move to destroy confidence in gold has failed. Kaye, who 25 years ago worked for Goldman Sachs in mergers and acquisitions...

    Kaye: “Well, as I said earlier, these guys are evil, but they are not stupid."

    ancientmoney
    Apr 23, 2013 - 11:27pm

    Latest message from Sinclair to his followers . . .

    " have had two messages to communicate to my extended family. The first was to invest in gold, not as a trader on margin, but rather as insurance against the ecopolitical trends that are moving to infinity.

    My concept is that problems/solutions by central planners comes out of the blue usually on a Sunday so if you are not insured by a solvent insurer you life’s work or a great part of it is toast.

    Now there is another message which is “Get out of the system.” The central planners know that the potential need for funds if met by QE would collapse the currency of the central bank doing the QE manufacturing. The yen is the present example, but much more so under the bankruptcy scenario. Insolvencies are therefore coming down on the head and in the pocket of the unsecured creditors (depositors) of the institutions which means you at banks and brokerage houses.

    This means owning gold and storing is not enough. How you own and store becomes of critical and possibly terminal importance. Investors with significant deposits at in the system banks and brokers are in the dead center of harm’s way. Retirement accounts are also in the cross hairs of central planners.

    The entire thesis of protection has become increasingly more difficult. The entire theory of gold insurance now depends on how and where. The concept of the gold ETF is completely wrong.

    In theory you may have done everything that appeared correct up to now, and still find out you are a casualty of the central planners.

    Respectfully,
    Jim

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

    I thought he always instructed "physical in your personal possession" but I guess he trusted the bankers to store it--til now.

    AlexCojones
    Apr 23, 2013 - 11:21pm

    Sorta Three-Sheets-2-The-Wind - Heading 4 Three

    So will apologize ahead of time here if I've offended anyone - in the past, present or future, , man woman or Blythe..

    Not sure where that phrase came from 3sheets to the wind....

    MsMaryMac
    Apr 23, 2013 - 11:09pm

    Newcrest weighs up future of mines

    https://www.smh.com.au/business/newcrest-weighs-up-future-of-mines-20130423-2icva.html#ixzz2RKCUaQzB

    ...... and the publication of production costs revealed that numerous mines across Australasia are unprofitable at current gold prices

    Someone at the Newcrest Mining better get in touch with JW before making any management decisions here.

    revlisdlog2013
    Apr 23, 2013 - 11:02pm

    To answer your question

    A high price defeats the other purpose of the manipulation...the false promotion of confidence in fiat currency and low interest rates.

    Quite a conundrum.

    TomMack
    Apr 23, 2013 - 11:00pm

    LSC 90%

    on SATURDAY 4/23 i got to the local coin shop too late for 90% this is the second time in 3 weeks they were out of stock but

    they were BUYING 90% at $25.23 versus their spot silver price of $23.28 or $1.95 over and SOLD it at 28.66 or $5.38 over.

    TODAY 4/23 they were BUYING at $24.90 or $1.93 over the spot silver price of $22.97 and were selling it for $28.26 or $5.29.

    that was for dimes and quarters; halves had a 17 cents bid premium and 65 cent sell premium.

    lets see how long it takes for the supply chain to get restocked and if it does what happens to the premiums (basis). while i do believe there is a general tightening on supply i think the 'system' will get restocked for another go round.

    now if i could just upload/downlown/STEAL Jake's charts put a garcia logo on them......j/k Jake i am really impressed with the detail level of your work. i would be very pissed too

    AlexCojones
    Apr 23, 2013 - 10:55pm

    JEEZ LOUISE- I just Got Robbed - at The Library

    Few minutes ago, I was digesting the Bad news, that my Bikini-Posting Daze might be over. Not much else to live for really. At my age.

    Then REAL BAD news, worse even than No Mo Bikinis! I was literally robbed at the Tempe public library. My wallet had fallen out of my back pocket, unknown to me, when a nice librarian approached and asked my name. When I said "Alex Cojones" (Actually the "other" name), she handed me my wallet. I looked inside and JEEZ LOUISE, as TF would say, all my Fiat Dry Powder (FDP) was gone. All $140 green.

    Dayum. That hurt. A Double-Dog-Whammy. Five Silver Eagles gone. No more Gold & Silver Bikinis. Vaporized. Gone.

    I asked the librarian what the "Good Samatarian" looked like. Male or Female? Female. White or black? White. Hmmmm. I did recall a largish white girl, 20ish, pass around behind me. At least she hadn't taken my drivers license, VA ID, or various other documents, like my Goodwill card ($6). No credit cards, so I'm safe there. Bless her heart. Probably she took offense at the bikini beauty I posted--and picked my pocket.

    Hope she NEEDED the moola more than me.

    Dayum. A Day That Will Live In Famy.

    AC

    Kcap
    Apr 23, 2013 - 10:54pm

    @ctob

    Agreed.

    FYI - whether its a JPM directional position or a position on behalf of a client, its still JPM in my book.

    System coming down in 3 - 2 - 1....

    Kcap

    PuraVida
    Apr 23, 2013 - 10:54pm

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