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
    philipat
    Apr 24, 2013 - 3:27am

    No one can say we were not forewarned...

    Liberty is Dead

    (1999)

    Granted, it would be a little easier if we knew in advance the kinds of signs to be looking for...

    Apr 24, 2013 - 3:26am

    Boston Marathon thread...

    ...is over there ----> Boston Marathon Bombing

    In case anyone interested, younger brother confessed in full (his account incidentally matches the exact LEO script disseminated far and wide beforehand, down to website/page where he got bomb design).

    In other news, Rand Paul is of the mind that drones can be OK after all,

    ""Fighting terrorism and capturing terrorists must be done while preserving our constitutional protections. This was demonstrated last week in Boston. As we all seek to prevent future tragedies, we must continue to bear this in mind."

    Pay no attention to the large groups of heavily armed and armored men drawing military cordon around suburb, conducting indiscriminate door to door searches with or without consent (just happening to miss the ONE house where suspect is eventually found). No need to worry about martial law being declared in Boston greater metro area (ca. 4.5M residents, depending on where you draw boundary line) on the exact 238th anniversary of the first battles of the Revolutionary War.

    (Also known as the War of Independence, this effort by certain portions of the Colonies to wrest their freedom from the British Crown inspired like-minded folks from the world over (even some who had tried but failed to win their own independence from their respective oppressors) to rally and join the cause.)

    The world is just f#$*ing dandy, nothing to see here, move along...

    Ed Bernays is cackling with glee at the smashing success his doctrine and legacy have become. Orwell and Huxley shrug and say toldya so as they get back to their Scotch and chess.

    Yes, things are indeed 'heating up'. I am just still not convinced this means all will turn out well for me or any of us.

    philipat
    Apr 24, 2013 - 3:24am

    Au levelling off now..

    ...@+1.02%. What a surprise!!!!

    philipat
    Apr 24, 2013 - 2:54am

    @JY896

    Not only that, but the sheeple applauded them.

    The Vet
    Apr 24, 2013 - 2:40am

    GLD Authorized participants @ Thanks foggyroad....

    There seems to be some familiar names in this list... Apart from their roles as APs for GLD we have major PM COMEX traders and a number of the members of the LBMA who set the London gold fix prices... A pretty cozy little club - and we are supposed to think it's all above board and squeaky clean? I wonder what price they fix first? The POG, the POS, lease rates or LIBOR? Maybe the payoff to the market regulators is the first item of business!

    Authorized Participants, Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman, Sachs & Co., Goldman Sachs Execution & Clearing, L.P., HSBC Securities (USA) Inc., J.P. Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co. Incorporated, Newedge USA LLC, RBC Capital Markets Corporation, Scotia Capital (USA) Inc., UBS Securities LLC, Virtu Financial Capital Markets, LLC (f/k/a EWT, LLC) and Virtu Financial BD LLC are the only Authorized Participants. An updated list of Authorized Participants can be obtained from the Trustee or the Sponsor.

    Karankawa
    Apr 24, 2013 - 2:33am

    All I can say, is those that appreciate the 'sovereignty' ...

    If themselves and their neighbors should just keep doing what you are doing. It's not an accident that 'sovereign citizen' has entered the MSM. I spoke with a local PO and he was fully able to explain to me how evil this 'radical' group is. But I could tell he was a nice fellow, and wanted the same freedoms for his kids that anyone would want. Those telling you the Ragheads are going to Change America, are the same ones that have used our efforts to steal America. Nuff, said.

    Tabberto
    Apr 24, 2013 - 2:11am

    bollocks

    fwiw you can buy krugerrands for 2-3% premium through gold investments ltd in the 'City' and sovs for around 10% premium with that cgt benefit built in

    Hagarth
    Apr 24, 2013 - 2:06am

    @bally Interesting Military silver use

    Discovery channel did a great piece on building a replica German jet plane. They engineers put a radar absorbing paint on the wing..in truth the whole plane was a wing. At one point the engineer described the paint as a colloidal silver paint costing $2000 a gallon. How many stealth vehicles are they going to need?

    Hagarth
    Apr 24, 2013 - 2:00am

    @Bugzy That pic

    As shocking as it is in tra-la-la-land floating through the internet ether, the image displays the man in the centre very well. No one attending to him, no one is blocking him and his face doesn't have a look of pain. The fracture of his leg is awful, but it is VERY clean...no meat strings or hanging clothing. The "Bone" looks like a garden rake handle.

    The top of the red heads hair look like BOGs work, crisp colour against the background.

    Sorry to comment on the pic folks...

    ballyale
    Apr 24, 2013 - 1:59am

    3rd Reason why PM's should explode.

    3rd Reason why there may be an imminent price explosion in the PMs The mother of all short squeezed. There has already been defaults on delivery.

    Along with depositor theft, everyone who has gold or silver in any banking system is going to want the real phys. This is only the start of a historic bank run on both deposits and real phys. PM's. It can only continue.

    So while the disconnect between Spot and Phys. has widened since the Smash Down,
    the Piper will or has already arrived.

    Can the Fed and Treas. "lend" another $500 Billion worth to suppress the fictional spot market? Who knows? I don't.

    So many banks are technical BK, that sooner or later a massive bank run by depositors will create a "waterfall" affect on the rest of the Banks. It's just a
    matter of time.

    I AM TURD,

    ballyale.

    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 9/14

    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

    Key Economic Events Week of 7/13

    7/13 11:30 ET Goon Williams speech
    7/13 1:00 ET Goon Kaplan speech
    7/14 8:30 ET CPI for June
    7/14 2:30 ET Goon Bullard speech
    7/15 8:30 ET Empire State and Import Price Idx
    7/15 9:15 ET Cap Ute and Ind Prod
    7/16 8:30 ET Retail Sales and Philly Fed
    7/16 11:00 ET Goon Williams again
    7/17 8:30 ET Housing Starts and Permits

    Forum Discussion

    randomness