Well, this is something that you're definitely going to want to read...
OK, so, it has been a long 3-day weekend and I just got in from the road. I'm clearing out my accumulated emails and I find a note from Andy Maguire. In it, he stated that it was "about time to update everyone" but that there was more to say than just through KWN or TFMR. Therefore, he was going to make public his weekly subscriber commentary...which we've turned into this "guest post".
I'm tired and my head is spinning so even yours truly is going to need to read and re-read this post in order to get my head around all that Andy is stating here. Suffice it to say, however, that I found it so imminently important that I felt I needed to get it posted for all of you as quickly as possible. Since much of this is written in Andy's "trader lingo", you may be left with some questions that need clarification so I'll try to help where I can in the comments section. However, there's A LOT here and I strongly encourage you to read it thoroughly.
p.s. As noted above, this post is excerpted from Andy weekly commentary for his subscribers and customers. The full link is here: https://andrewmaguiregoldtrading.com/market-analysis More information on Andy's invaluable services can be found here: https://andrewmaguiregoldtrading.com/users/signup/MaguireLive and here: https://andrewmaguiregoldtrading.com/
"The Heightened Risk Of A Gold Price Reset"
by, Andrew Maguire
On Feb 6th I warned of a heightened risk of a gold price reset based upon evidence that the all-important physical markets are increasingly influencing the price setting synthetic markets at time we are experiencing extremely strong physical demand into tight immediately deliverable supplies.
I have been drawing attention the increasing outflows of liquidity from the paper markets into the physical markets for over a year now. The last selloff from 1380 in July to 1130 in December provided clear footprints of a disconnect between the 2 markets and bears all the hallmarks that the rigged decline broke the back of the paper market. By December 2016, an ‘abyss’ had appeared between these 2 distinctly different markets, very visible to wholesale market liquidity providers and takers, but also verifiable by the corresponding reported data.
The cobasis, backwardations, GOFO, Opex pricing and structure, SGE premiums as high as $46 per oz., backed up what I was reporting from a wholesale market perspective, which is why we knew with certainty that gold would not settle below 1130, almost $100 above the target of 1045 that almost all analysts were touting. In fact, during the entire selloff from 1380, at no time had ‘fair value’ drop below 1300. (more on fair value later).
Synthetic players are disconnected from the delivery markets and, as a result, are blinkered to all-important real supply demand inputs, however, officials and agent COT’s, (driving the directional HFT’s), exposed to the physical markets clearly are. Consequently, despite bearish sentiment & momentum having ignited and fuelled a major selloff, (capitulations & sucked in spec short selling), gold bounced exactly at the PHYSICAL support level, NOT the synthetic market target. 1130 PHYSICAL support was well above of the COT/central planners sweetspot and despite evidence they were taking the long side of spec selling, (after expending large short fuel anticipating a much deeper discount), the residual short COT/Official OI lines did not cross equitably at 1130. Even worse, this support rose from there.
This left sizeable naked short Comex OI & related derivative positions locked out of Futures short cover but worse, leaving COT’s significantly off side on billions of dollars’ worth of bearish derivative bets. Furthermore, recognising CB and sovereign support at 1130, COT’s were forced to front run these physical orders to ensure they wouldn’t fill. Given these front run CB sovereign limit orders were largely unfilled, we have since witnessed an uncharacteristic chasing of price by these buyers. Historically, Sovereign entities and well informed CB buyers were afforded the luxury being able to read synthetic data and relying on fractional deliveries vs. OI, were able to wait for the synthetic non-delivery market to bring price to them. With the physical dog now heavily influencing the paper market tail, this is no longer the case. Each subsequent stair step, 1176, 1204 & 1222 has further locked out commercial short cover. On Friday, although not yet of sufficient size to call solid support yet, the threat of 1232.30 becoming support started to materialise. So close to the Fibo inflection point at 1250.60, such a stair step rise in PHYSICAL support, poses a serious threat that threatens a commercial signal failure.
As noted on Friday in my opening post, “There is always a danger that COT’s can short with impunity when the synthetic price gaps too far above these stair step support levels, however, with support so close under the market and steady physical accumulations noted yesterday at 1240 off Loco London, COT’s have to be careful in shorting into such tight conditions with tightening spreads and a rising cobasis implies that only limited short cover is available. Footprints provide more evidence of an increasingly driven physically market forcing some discipline upon COT’s who although offside on Opex positions are forced to deliver physical.”
To those who are concerned that historical patterns will repeat themselves, there is an unprecedented difference between the December 2016 $1130 bottom and the December 2015 $1045 bottom, this time the physical market had gained sufficient traction to limit the scope of directional HFT behaviour. Why? Because the paper price set in London is ultimately deliverable both on & off Loco London. Dips inspire under the radar OTC spot index buying which members know, lock in the price and when presented for delivery force COT’s to go to market and buy gold to meet delivery. The BOE flywheels daily shortfalls but then lays the liability onto the BB’s who have gold bank account facilities with the BOE. Note the German repatriation had to wait almost 3 years for the Fed to be able buy gold at market to repay loaned out physical bars.
The commercial short squeeze is leaving central planners little ability to pay back loaned/leased /swapped gold at anywhere close to equitable prices. Based upon the footprints into February, I stated that there was a potential for price reset in as little as 90 Days. Although this window may possibly be extended to the end of the 2nd Q, the action since my assessment on Feb 6th has reaffirmed my view.
This naturally sparked off some questions. Namely, what will happen to Futures and option positions in the case of a reset.
From time to time I share specific members’ questions in commentary. This was the specific question I received related to the Feb 6th commentary regarding the inevitable gold price reset. Q. “if the day before the reset I am long both in-the-money and out of -the-money Silver calls on the COMEX, and after the reset I have profitable positions, will I be able to sell my Silver calls for a profit? It sounds to me that if I am long silver calls on the COMEX, I may be frozen out from doing anything.”
To answer this, we have to look at the bigger picture. We looked in detail at how billions of fractionally anchored offside Gold and Silver derivative positions had accrued, (OCC report), while a competing physical market has increasingly preyed on the visible price disconnect below supply demand ‘fair value’. It should be noted that the Cobasis currently pointing to a fair value close to $1350, is anchored upon a 92/1 dilutive fractional reserve price. However, real physically derived ‘fair value’ is unknown and after 4 decades of synthetic dilution since the gold peg was removed, a true price can only be estimated, but clearly and conservatively, several hundred dollars above the current diluted price. This is not just my view, this is also consensus of my largest instuitional clients who are close enough to Sovereign/ CB buyers competing for physical below fair value.
Liquidity outflows into the physical market has created a fracture between the paper & physical markets, now developing into an ‘abyss’ caused by strong physical market demand disrupting fractional reserve pricing mechanisms. Other than the slow train wreck of an unthinkable daisy chain TBTF default, there is only one solution, a paper price reset.
I use the word ‘abyss’ deliberately and draw your attention to the most prominent recorded paper price ‘default’ evidenced in 1999. This was when GS spun out of control after being hung with the auditable recorded 100/1 naked short gold position that LTCM had accrued before they failed. To avert a TBTF daisy chain BB default, in an emergency move, GS was bailed out by the BOE 400 tonne PHYSICAL gold sale known as ‘Browns Bottom’.
Shortly after the Bank of England bailed out Goldman Sachs in 1999, Eddie George, governor of the Bank of England, facing a Goldman Sachs bankruptcy admitted the following, these are his exact words. ” We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore, at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K.”
Eddie George’s career had seen him seconded by the BIS & the IMF and, after he retired, sat on the board of NM Rothschild. No one was closer to the inner workings of the Loco London Gold market.
This was a price reset enforced by central planners/Officials and, as quoted by ‘Steady Eddie’, “at any price, at any cost, the Central banks had to quell the gold price”. Yet, here we are again, 100/1 short & with physical demand at unprecedented levels, only this time, there is zero PHYSICAL gold to flywheel to dilute supply and “get the gold price down”.
We are witnessing an unprecedented condition, because never before has the physical gold price been set outside of officials control. With liquidity flowing out of the paper markets into the physical exchanges off Loco London, Synthetic attempts to swamp supply simply cannot be of sufficient duration or scale for central planners to bail out the banks embedded positions. Much of these BB positions have been accrued at the behest of the BOE, the FED and the all-controlling BIS trading desk.
As a result, these agent BB’s are once more teetering on the edge of the abyss, exposed to billions of dollars of naked short derivatives exposure, accrued since 1999. With the spot price ultimately deliverable outside the LBMA casino, without physical to meet discounted demand, selling paper gold below official demand is going to tip these TBTF banks into the abyss.
So here in 2017, and aside from an unthinkable default, this is how a cash settlement will play out. The conduit was already set up in July 2011 where Dodd Frank blocked US citizens from trading FX gold in the OTC LBMA market. Not long after, the CME brought in fresh halt trade rules that can freeze Comex OI for 5 mins, (options 3 mins), while the OTC spot market can trade unaffected. This ensures that any black-swan event that spike gold higher during a live session provides a back door to LBMA BB’s operating on the Comex to offset or indeed profit enormously by going long in the OTC markets, while the hot money and US traders are hung out to dry.
Given that insiders, the market making COT’s and Officials, are able to offset short positions off the Comex, as soon as the Comex reopens, another freeze would be imposed as the price would be halted again. This action would continue into the market close so that a more structured reset can be imposed.
Given the hundreds of tonnes of underwater short positions, offsets on the OTC markets will be massive and will essentially break the market as the price rise on the Comex and the multiple market halts will exponentially ramp up the OTC bid. Bear in mind, there is a 92/1 fractional reserve imbalance and with the rise in Physical prices AND THE FRESH DEMAND, there is no way Officials or BB’s, short thousands of tonnes, (many years’ annual production), could survive without there also being a cash market reset in London. This is why it is important to have physical gold and silver vaulted outside of the western banking system. The FX gold market cannot cease to operate, so the reset will benefit insiders who will have placed massive long bets to offset shorts ahead of the reset. Silver will rise with gold in a similar way.
The BB’s have been delivering gold out of unallocated bullion accounts with a paper guarantee from the BIS that it will settle these BB ledger entries. Given the BIS has direct exposure to the physical market, they will coordinate this event. I see a cash price reset as an already planned event that will avert any embarrassment that a TBTF tax payer supported bank will default. The only orderly way to affect such a reset will be to instigate it over a weekend.
We are approaching the point where, once more, the FED/BIS is looking into the ‘abyss’ and this ‘non-default’ bailout reset will be triggered. They will simply square these entire paper entries one market close for cash at the closing price with the stroke of a key. Spot gold holders will be insulated as it would be virtually impossible to default on a FX cross. I.E., a short dollar long gold position that trades a part of a 5 trillion a day FX market. However, all unallocated LBMA gold account holders will be settled with cash on the prior day’s pre-gap price rise.
To eliminate billions of dollars of derivative exposure, all derivative positions will be marked to market at the reset point. The Comex cannot afford to ‘default’ but has the option of cash settling positions without it being considered a default. However, with insider BB’s being able to offset Comex positions in the OTC markets ahead of the reset, it is possible Comex options and futures may survive the reset, it is the naked short portion of hot money short positions that would be at risk. I would be looking for COT’s footprints to be going uncharacteristically long in the OTC market to provide this clue. It is the wholesale market footprints that will give us advance notice of a price reset. I am already seeing the early warning signs.
We will shortly be able to offer our clients Electronic Vault Warrants (EVW’s) on our ABX platform. This will allow physical holdings to be margined up to 80%. Once these warrants are launched, I see the Comex as finished and if the reset has not been triggered before this launch, I see this as the final trigger, as there will be little incentive for traders to trade in the casino. If you wish to open a live ABX MetalDesk platform here is the link. https://www.goldstarglobal.com/ There is no immediate requirement to fund it, but this will provide you the conduit to electronically trade wholesale physical when you are ready.
For margined traders looking to actively trade zero counterparty risk physical gold and silver outside the US Comex rigged casino, then preparing the Comex alternative is a step that could be taken now. It costs nothing to set up the trading platform and there is no obligation to use it but it can be ready to utilise.
The beneficiaries of this Comex ‘default’ will of course be the Physical exchanges to which large size institutional liquidity is already flowing. The Allocated Bullion Exchange, (ABX), is a 100% physical exchange and has no skin in the game, so our clients, who have segregated vaulted bullion holdings, will have accounts that 100% reflect the re-setting PHYSICAL price. Exchanges such as the SGE will also benefit from a price reset. I will update this timeline within 2 weeks.
Final note to TFMR members: I'll try to coordinate something with Andy on this "timeline update within 2 weeks". Will keep you posted.