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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    turd [at] tfmetalsreport [dot] com ()

      320 Comments

      Refresh
    Gold Dog
    Apr 24, 2013 - 8:22am

    @Harald

    I have purchased from them about ten times over the last 6 months. I talk to the guys at the Del Mar store. I admit they all sound like Spicolli in Fast Times but they have never let me down. I guess we all have our horror stories. I will never do business with Hans again. He was so nonchalant about my concerns and the order, for me anyway, was humongous.

    Best,

    Dog

    Apr 24, 2013 - 8:21am
    Mr. Fix
    Apr 24, 2013 - 8:14am

    @ Keg

    You said:

    " Going all in on a mad max scenario happening in the next year is no better than doing nothing. "

    I disagree, to say the least. If one is preparing for a Mad Max scenario, and nothing happens, his only downside is he will have an abundance of provisions, and you can consider that savings.

    If however a Mad Max scenario were to unfold, and one is unprepared, the outcome will probably be death.

    There is really no downside to being prepared,

    there is an enormous downside to being unprepared.

    Prepare accordingly.

    Harald
    Apr 24, 2013 - 8:13am

    Thanks Ojibwemowin

    Very interesting to read an alternative viewpoint, hope you keep posting. This fellow is at the other end of the spectrum from me, and most of the others on this forum to say the least.

    Larry
    Apr 24, 2013 - 8:11am

    @ArtL

    "Stansberry sure does have a lot of words with a very low information rate. I found his newsletters suffered from the same defect." "He does not get to the point soon enough to allow me to maintain my attention."

    True. As compelling as some of his headlines are, I've never been able to get through two pages or two minutes of his print or online pronouncements (advertisements).

    Too many words, much like QE, devalues each word. Unlike Benny, maintaining a low interest rate is surely not the goal he has in mind to sell his wares... whatever they might be.

    achmachat
    Apr 24, 2013 - 8:09am

    Orange

    would it make you feel better if somebody with medical training were to tell you that:

    1) this guy should not be running marathons, because marathons are not for aliens with super powers; it's just not fair towards the regular humans.

    2) this guy has been a double amputee since before the Boston event and is wearing special effects prosthetics in that picture (without trying to find out the motives for this).

    But in any case, you do have a point. Even if this picture was from a movie, I honestly do not think it should be posted like this on main street, especially since Turd has provided us with a Forum to discuss the events of that day.

    Ojibwemowin
    Apr 24, 2013 - 8:07am

    mindset of alternative viewpoint

    My very successful private investor friend sent me another note out concern for my persistent interest in gold. Here are his latest bullet points that give us some further insight into the psychology of alternative viewpoints:

    1. The recent sell of in gold compared to losses in energy and base metals sectors validates the view held by many that gold is significantly overvalued. Selling of Cypriod gold reserves would equal less that 1% of gold ETF holdings.

    2. The inflation adjusted price of gold since 1975 has averaged between $600-800 per oz. US headline inflation would have to be over 7% per year for a decade in order for gold to be fairly valued at even $1400.

    3. Gold valuation should be thought of as a mix of standard financial assets; an inflation indexed, infinite maturity bond, and a portfolio of assets that are highly liquid, portable, internationally exchanged, devoid of credit/counter party risk, and held in reserve by monitory authorities ( sounds compelling to me!)

    4. Applying this model on a timeline spanning the last decade there is an indication that the latest gold bull, which has occurred since the collapse of Lehman, has been based on the portfolio components of gold's valuation profile, versus the bond component. As things stabilize, as he says they always seem to, and if dollar and inflation volatility further stabilizes, investors are going to find that they are paying a very high price to insure their portfolios from severe dollar and inflation outcomes.

    5. Gold is a bona fide asset, albeit a very expensive form of portfolio insurance. There are several scenarios that could give gold another upshot or sideways trend, namely, investor fears of inflation and loss of dollar hegemony; which he doesn't see being even remotely challenged for at least another 10-20 years relative to China or any other currency, given all US assets compared liabilities relative to other parts of the world. He talked about short-term upshots in gold price and sideways trading periods as only temporary and behavioral in nature as investors realize the temporary overshoots of the Fed's inflation targets. He advises taking profits on such periods with tightened stops at strategic levels.

    6. In the event of a dollar bullish cycle (which he believes in) gold will eventually revert to it's long term average "real" price which is in the historical range of $600-800 per oz. Despite my challenge to the contrary, his sources indicate that average gold per ounce base production cost is in the neighborhood of that range.

    I have challenged him over the last few years with alternative viewpoints, such as those talked about here, but he does not subscribe, stating evidence from what has been happening, which has certainly been frustrating to my viewpoint. He has mentioned something about a hedged portfolio position that includes a 50% bond, 25% cash, 25% gold mix.

    Take all this for what it is. I simply find it fascinating that different viewpoints can form from the same period in history. Like I said this guy has been doing what he is doing independently and very successfully for over 40 years. Time will tell us which view holds sway, more likely an amalgamation over the short-term, recalling Dr. Kings quote that the arch of the moral universe is long, but bends toward justice. This does not occur without a struggle. I am willing to take my chances with the unique characteristics of gold with my discretionary funds, but I will also hedge with other financial assets even though I have to admit I would like to see vindication on my preferential time-line......sooner than later!

    Keg
    Apr 24, 2013 - 7:58am

    @Jugger

    Excellent post. I believe since we are experiencing something that has never happened before in history - all the major economies debasing their currency at the same time. Since it has never happened before, no one can be certain as to timing and the ultimate end result although I am in the camp that this will not end well for most people. I read and listen to the "experts" to understand what they are looking for but do not believe any of them really know. Going all in on a mad max scenario happening in the next year is no better than doing nothing.

    Harald
    Apr 24, 2013 - 7:54am

    Liberty?

    I ordered from them and after they eventually got it straightened out (This was probably a year ago when things were more normal.) I vowed never again.

    Gold Dog
    Apr 24, 2013 - 7:45am

    Yes! SRS has done great work on costs!! Thanks!

    As I posted on Monday. I ordered 50 GAEs from Liberty I think on Friday and they are in the mail now. Shortage? I will try another 50 when they open and report back.

    Dog

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