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

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      320 Comments

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    Groaner¤
    Apr 24, 2013 - 10:14am

    @DPH

    I heard it's taking so long for those new $100 bills because they have to change them to $125 bills to reflect the up coming inflation..

    ¤
    Apr 24, 2013 - 10:11am

    Well, well....what do you know? - Golden Timing


    April 24, 2013, 10:00 a.m. EDT

    New $100 bill to enter circulation in October

    By Steve Goldstein

    WASHINGTON (MarketWatch) -- The Federal Reserve on Wednesday said the redesigned $100 note will begin circulating on Oct. 8. The note incorporates new security features such as a blue, 3-D security ribbon and can be foundhere. The design was unveiled in 2010, but the introduction had been postponed due to printing problems.

    Marketwatch.com

    ratioarbitrage
    Apr 24, 2013 - 10:09am

    Silver Institute 2013 report released today

    I attended their webcast just now. A summary is at

    https://www.silverinstitute.org/site/2013/04/24/continued-strong-silver-investment-demand-drove-annual-average-price-to-second-highest-on-record/

    It is still possible to listen to the audio at their website, but you have to give them an email address. Both the outgoing president and the new guy had things to say about the focused smackdown of this April. I submitted questions about 1) Pascua Lama/Bingham affecting 2013 mine supply (which they said will be up) and 2) Availability of retail silver in North America. My questions were not taken forward. A lot of questions from the banks were taken and were essentially bearish comments.

    It was an interesting hour. The president was forced to contradict himself several times as he put out what sounded like a predetermined bearish tone but also comments on the hugely bullish physical developments now unfolding. The outgoing pres. was a lot more bullish. Perhaps that is why he is outgoing.

    They will no doubt put a summary on their website with slides at some point like last year. It is a useful summary of current physical data, although with the usual caveats.

    tmosley
    Apr 24, 2013 - 9:55am

    tpbeta: You have a head full

    tpbeta:

    You have a head full of shit or something? You were the one that brought up Austrian economics like you knew what you were talking about. It's not my fault you wallow in ignorance.

    I also like how you totally ignore history, and focus only on the current case, and then, only on this super short timescale. FYI, that's what ALL governments as well as all citizens affected by normalcy bias have done throughout history. You don't study history, and you don't pay attention, and that's why you never know what is going on.

    Since you FAILED (as in, got a zero because you didn't even attempt) to answer my question, I will answer it for you. The longest fiat regime in history existed in China, during the Yuan Dynasty. It lasted for 60 years, and experienced three bouts of hyperinflation during that time. It ended in Civil War. They, like us, were a hegemonic power with more or less total control over all the other governments of their world, and were unassailable from any external military threat, as we are.

    They also had a thoroughly cowed population which by and large gave total deference to their government, who they considered to have the "Mandate of Heaven". Perhaps we are similarly cowed, perhaps not. But the point is that even those governments that had similar or even superior control over their populations still destroyed their currencies by printing money, and the result was catastrophe.

    Now, for the next question, why don't you tell the class where you heard that hyperinflation instantly follows money printing? Momma, perhaps?

    CrimsonAvenger
    Apr 24, 2013 - 9:52am

    Year of the Dragon bar

    I agree with Dr. Jerome that we need more pics of the PMs. Here's one that (hopefully) will be on my doorstep in a few days. Beautiful.

    opticsguy
    Apr 24, 2013 - 9:52am

    Interesting graph, courtesy Purdue Univ

    The supposed record corn crop is in jeopardy. Per Agweb, Indiana has only 1% of their corn planted (too muddy). The upper Midwest could still get snow this week.

    Here's a view of Green Bay. Menominee, WI is on the other side.

    Harald
    Apr 24, 2013 - 9:47am

    Those Indian Head coins are gorgeous

    I used to buy Morgan dollars but they have become more expensive in the last year or so and the ones available at my LCS are in rough shape. I still can get old gold for a pretty good price. (A few bucks over spot.) LCS proprietor says that old gold and old silver that he doesn't sell in the store goes to the scrap dealer and is melted down. In other words, the old stuff is going away. Same with so called "junk" silver. What's available at the LCS is in sorry shape, guess all the good stuff is being hoarded or has been sold and recast.

    Texas Sandman
    Apr 24, 2013 - 9:38am

    @Killtherooster: ASEs

    Bought a bunch at liberty last night for $27.20 (probably a bit higher today).

    They said "in stock" at their Del Mar store.

    ballyale
    Apr 24, 2013 - 9:29am

    There's approx. 1 Billion Oz. of Silver above ground. At say $30

    Per Oz. it's the equivalent of the Fed stopping their purchases of toxic waste mortgages for only 1 month and buying up all the above ground silver there is.

    Of course, that won't and couldn't happen, because, though, there may be that much silver above ground, there isn't that much available to purchase.

    This just shows how ridiculous the PM paper market is.

    ancientmoneyDoctor J
    Apr 24, 2013 - 9:29am

    @Dr. Jerome re: pre-1933 gold coins . . .

    Yes!! If you can get them anywhere near spot, it is a great find, and should be bought without question, assuming you know they are real.

    The incuse Indians in $2.5 and $5 coins are among the most beautiful coins ever made, in my opinion.

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