As gold refuses to buckle under the stress of a sharply falling yen, signs are increasingly pointing to stress within the physical delivery system...stress that might ultimately break the physical---paper link.
If you listened to yesterday's A2A, you heard Mr. Turk emphatically agree with my assessment:
Without physical delivery at the paper price, the paper price loses all legitimacy.
It is absolutely critical that you understand this. We're not talking about stocks, bonds or other, strictly paper assets. Instead, we're talking about hard assets...commodities, specifically precious metal. In order for a paper derivative contract to have relevance and legitimacy, there MUST be physical transactions consummated at/near that price, otherwise it's just a fantasy.
For example, you and I can't establish a contract for an ounce of gold at $100,000 (yet). Why? Because I won't buy it from you at that price (yet). I can find it cheaper (for now). Similarly, we also can't establish a contract for an ounce of gold at $20. Why? Because I'm sure as shit not giving you my gold for $20/ounce. In both cases, we can establish these contracts all we want but they're illegitimate...they have no relevance...because physical transactions are not taking place at the prices our paper contract specified.
This may be a gross oversimplification but I imagine you get the point and you can see how this analogy fits in with today's paper gold derivative market. If the bullion banks are unable to source physical gold to deliver at the current paper price...a price which has been uneconomically driven lower by HFT algos that sell gold tick-for-tick with the yen...then the paper price loses credibility. This is what we've been waiting years for and we may be seeing the first signs of this phenomenon right now.
Again, as discussed to the point of tedium, the paper price of gold has been loosely linked to the falling yen since 2008. However, this horrific distortion has reached a disgustingly odd, perfect correlation since June of this year. (Note the blue box but also note the red oval on the chart below.)
It's that red oval that has my attention. Why would gold suddenly begin to diverge from the yen link? Conceivably, since they're both paper contracts driven by computer trading, there's no reason for them to suddenly separate. If the USDJPY is going to 120 and then 145, then there's no reason why paper gold can't fall to $1000 or even $900.
Ahhhhh.....but there is a reason. Fundamentals. More specifically, physical demand and the requirement for physical metal to be delivered at the manufactured paper price. I'll remind you again of the sudden, huge drop in London GOFO rates that began three weeks ago. Note that today saw another new, 15-year low in the one-month rate and the six-month has once again turned negative. Negative GOFO has always been and always will be (at least until Jan 30) a signal of extreme physical tightness in London, where gold in tonnage is delivered.
Considering this, let's look even closer at the fraying gold-yen link. Here's a two-month chart:
And here's the chart for just the past 5 days. (This chart isn't perfect because the scales aren't quite the same percentage but it works nonetheless.)
And now, as I type, both metals are extending their gains even while the yen inches back lower (or the USDJPY inches back higher at 116.553). I have a last in the Dec gold at $1175 and the Dec silver is $15.90. Things are currently moving so fast that I'll need to excuse myself for a minute in order to print off some new hourly charts. I'll be right back...
OK, I'm back. Again, the point of all this is that we MAY have found the price levels below which The Bullion Banks cannot source enough metal to meet the physical delivery demands. Not wanting to lose their scheme which has served them so well for nearly 40 years, The Banks have no option but to forcible break the gold-yen link and begin squeezing the shorts. Now, they've got to be careful, though. The last thing they want it to set off a panic and drive price way higher and back through the long-term trendline. (More on that next week.)
For today, though, let's watch the action very closely. A CLOSE in gold ABOVE $1181 would be a very encouraging sign and it would make all of the smarty-pant shorts who sold below there VERY nervous heading into next week.
Note how price has sprung from the $1145 level on three, separate occasions. This could be, might be, is possibly the level below which The Banks can't find enough metal to meet physical demand.
The same might be said for silver. Note how price has now sprung twice from $15.25 and a close today back into the 16s would be very constructive.
Finally, one more piece of the puzzle that has really captured my attention is the surging Comex open interest. The numbers for yesterday are still preliminary as the final numbers are not released until early afternoon the following day. However, the preliminary numbers show another HUGE jump in total open interest for both gold and silver.
Yesterday, while gold was up a measly $2.40 and was contained within a 1% range for the session, the total Comex gold OI apparently surged by another 9,700 contracts as 8,700 Dec14s were closed out while 15,700 Feb15s were opened. IF these numbers verify, the total gold OI is now 450,363. This is up nearly 90,000 contracts (+25%) from the multi-year low of 360,935 seen back on August 27. WOW! This would also be the highest total OI since May 20, 2013.
In silver, total Comex OI rose yesterday by 3,565 to 175,263. IF verified later today, this would put the total Comex silver OI back within shouting distance of the all-time high of 179,608 seen back on October 30.
So, what the hell does this mean? As you know, silver OI has been at record high levels for quite some time but why the sudden, 25% surge in gold OI??? And upon which side of the trade are all these new contracts being opened? Is this a parade of late-coming Large Spec shorts, chasing the yen and getting absorbed by a greedy Cartel ready to slam the Bear Trap on them? Maybe. We'll know a little more later today when the CoT is release at 3:30 EST. Rest assured, it will be a major topic of discussion in today's podcast.
OK, it's getting late so I'd better stop here and get this posted.