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The Upside of a Yuan-Gold Peg

Wed, Aug 1, 2018 - 11:18am

So far, all we've seen is downside and negatives from the apparent linkage of the CNYUSD and Comex gold. Could there be a positive resolution by the time this all finally plays out?

Since there's no change and seemingly no end in sight...

...let's try a little thought experiment today.

First, let's make some assumptions:

  1. The yuan-gold peg is real and it's being driven directly by the PBOC.
  2. The US-China trade war worsens to the point where Trump places some level of tariff on all Chinese imports.
  3. The PBOC responds by devaluing the CNYUSD by as much as it deems necessary...let's say 30% total.

What would be the impact on the price of Comex Digital Gold? Well, since late April, the CNYUSD is down 8% while CDG is down about 11%. See below:

IF this relationship/ratio were to continue all the way down to CNYUSD down 32%, would Comex gold fall 44% from it's April level? If so, that would place price near $800. Yikes! Holy crap!! Where's the Tylenol!?!

But stick with me on this...

In 2015, price very clearly found a "physical floor" near $1050 gold and $14 silver. It was near these levels when it appeared that the LBMA was breaking (recall the massively record-breaking negative GOFO rates, the LBMA vaults were empty (recall Ken Hoffman of Bloomberg in 2013) and the HUI bottomed near 100 (as prices fell below many miners cost of production).

Thus, the conclusion at the time was that the paper price was allowed to rally in order to maintain the connection between paper and physical. Any further price decline was a risk to the entire Comex/LBMA digital derivative and fractional reserve system.

Fast forward to today.

If we work under the three assumptions laid out above, do you think the Chinese/PBOC give a rat's ass about physical floors, mining costs and the LBMA? The answer is not only "no" but "fuck no". Under this scenario, the Chinese ONLY care about the competitiveness of the yuan and maintaining a CNYUSD devaluation commensurate with the trade wars and tariffs.

Well, given that the All-In-Sustaining-Costs (AISC) have only risen since 2015 and given that major miners are already suffering and posting losses at $1300 gold, how many mining companies might be forced out of business at $800 gold? Not only that, how would a significant drop in physical supply affect the physical market?? And if the physical market tightens past the levels of late 2015 and gets significantly worse, what will be the impact on the LBMA???

And so you see, this is where it could all get VERY interesting. IF China is intent upon driving commodity prices as low as required by the falling yuan, the distortions already inherent to the fraudulent Comex/LBMA scheme should worsen to levels which would make the system crack and crumble. AND THIS IS WHAT WE'VE ALL BEEN WAITING FOR!

How many times have we written about the day when delivery failures take down the Comex and LBMA? How many times have we spoken of the unsustainability of the current pricing scheme and the game of musical chairs of alleged physical ownership where there are more than 100 claims on every available, physical ounce?

Well, what would a paper price of $800 do to The Banks who would be on the hook to physically deliver gold at that price...at a time where the vaults are empty, unallocated accounts are unfunded and mine supply is dwindling?

And there you go. Finally, what we've all been waiting for. Total destruction of the NY/London Digital Gold Pool. And maybe this is all part of the master Chinese plan after all? Accumulate physical gold and then force a global reset in price that revalues your gold reserves (which you finally reveal to be 10X what you've stated in the past) multiple times higher. This also "revalues" your existing mountain of debt, it revives your currency by making it stronger and it allows you to ultimately offer some sort of reserve currency option against the US$.

Do you remember this from a few years back?

I know that may sound like some sort of pipe dream and a stretch...but...again...given what we know...and given the three assumptions above...why couldn't things unfold in this manner in the months ahead?

Just some food for thought on a Wednesday.

TF

About the Author

Founder
turd [at] tfmetalsreport [dot] com ()
· Aug 1, 2018 - 11:20am

Mostly taken from yesterday's morning post.

The Yuan-Gold Peg and the Commitment of Traders Report

The Commitment of Traders reports for Comex gold and silver are back to levels the often precede price bottoms. Could they also be telling us something about the current yuan-gold correlation?

As background for this article, please be sure to review these two posts from last month where we first laid out the details of the current yuan-gold correlation and then projected what it might foreshadow.

Our working theory is that China, knowing that a massive devaluation of the yuan versus the dollar is possible/pending due to the expanding U.S. tariffs, is actively attempting to manage lower the dollar price of many commodities, including gold. Simply put, if the dollar price of these goods can be dropped by roughly the same percentage as the yuan devaluation, the relative cost of the goods in yuan remains unchanged.

Here are the last two months of CNYUSD and Comex gold plotted together:

But again, it's not just gold. Here's the CNYUSD with Comex copper:

Here it is with Comex platinum:

And here it is with Comex zinc:

As you can see above, however, the most pronounced correlation is in Comex gold. The question becomes: Is this a deliberate program by the PBOC to act through their global accounts to influence the futures markets OR is this just a bunch of items, trading in tandem and simply reacting to the same stimuli of pending tariffs?

And this leads us to the most recent Commitment of Traders report for Comex gold. On report released last Friday July 27, (surveyed Tuesday July 24), we saw four significant levels:

  • The gold Large Spec GROSS short position was 172,203 contracts. This is a new ALLTIME high, eclipsing the 159,441 level seen on July 21, 2015 (four days after "Gold Is A Pet Rock" - WSJ).
  • The gold Large Spec NET long position was 48,597 contracts. That's the lowest since January 19, 2016.
  • The gold Commercial NET short position was 65,668 contracts. That's the smallest since January 26, 2016.
  • The silver Large Spec GROSS short position was 84,487 contracts. This is a new ALLTIME high. The previous peaks were 82,934 back on April 3 of this year and 81,400 contracts on July 14, 2015.

OK, on the surface, that's all pretty bullish, right? There appear to be record amounts of Spec short fuel for an epic squeeze. And most likely this is the case. All we need is a turnaround to start the short-covering extravaganza.

However, you should also consider this...One of the "solutions" that we've discussed for how the PBOC could drive the apparent yuan-gold link is massive shorting through offshore accounts. Sort of like how you see US treasury buying and selling from places like the Cayman Islands when the TIC reports are reconciled (https://www.zerohedge.com/news/2016-06-15/what-behind-record-sale-75-bil...). In this scenario, the Chinese could be using their own offshore funds to effect Comex prices. If this were the case, these accounts would likely show up in the Large Spec category as they almost certainly wouldn't be listed as Commercial.

Again, none of this can be proven. We are simply speculating. However, you'll recall that the yuan-gold peg really took over on June 15, two days after the FOMC. Gold had been steady and rising above $1300 and the CNYUSD was stable, too.

On the CoT surveyed Tuesday, June 12, the Large Specs were GROSS short 72,512 contracts. Again, as of last Tuesday, this position had grown to an alltime high of 172,023. That's nearly 100,000 new shorts! Now granted, much of this 100,000 came from "traditional" Specs such as hedge and trading funds as price broke down through both the 200-day and 200-week moving averages. But 100,000 contracts?? That's 10,000,000 ounces of new shorting!

For perspective, let's look at the last couple of times Comex Digital Gold has been smashed on a scale similar to the present:

  • After Trump's election, price fell from $1330 to $1130 in seven weeks. The Large Spec GROSS short position rose from 73,177 contracts on 11/1/16 to 112,305 on 1/3/17. An increase of 39,128 contracts.
  • At the bear market lows in late 2015, price fell from $1180 to $1059 in seven weeks. The Large Spec GROSS short position rose from 68,551 contracts on 10/27/15 to 143,141 on 12/8/15. An increase of 74,590 contracts.
  • In early 2015, price fell from $1290 to $1140 in seven weeks. The Large Spec GROSS short position rose from 43,991 contracts on 2/3/15 to 113,953 contracts on 3/24/15. An increase of 69,962 contracts.
  • At present, price has fallen from $1305 to $1215 in seven weeks. The Large Spec GROSS short position has risen from 72,512 contracts to 172,023. An increase of 99,511 contracts.

So, does this prove that the Chinese are driving the yuan-gold link as we suspect? Of course not. However, the CoT data certainly provides some circumstantial evidence of how it might be taking place. Would 25,000-30,000 contracts of PBOC shorting be enough to establish and maintain the peg?

It seems the answer may be in how the data changes when price finally begins to recover. At that point, we'll have to diligently watch the yuan-gold correlation and the CoTs to see if they change in unison. Will price rally in a traditional short squeeze or will price only crawl higher while the massive shorts remain in place, despite what would be significant margin calls? Will price finally break free of the peg as shorts are squeezed and covered? These questions will be answered in the weeks ahead but it's good to start considering them now as we try to determine where gold prices are headed in the second half of 2018.

Charles Gourlay · Aug 1, 2018 - 11:26am

If it happens this way then it was planned that way 

jim stowell · Aug 1, 2018 - 11:28am

Great thinking Turd

RickshawETF · Aug 1, 2018 - 11:29am

Numero Uno!

Nice move by Kirkland Lake this morning. I'd forgotten what "green" looked like on the board.

KL options are on fire. May have to convert some to-fiat-to-silver and take advantage of the bargains . . .

jim stowell · Aug 1, 2018 - 11:32am

Seemingly at some point they have to cover their shorts across a big range of commodities if in fact they are pressing prices lower. It'll be interesting to see how they do that. How can they as a nation be accumulating gold on the drop and at the same time suppressing the price? Probably a page out of the JP Morgan play book helps. Maybe now a little nudge is all that is needed to get the algos to follow along? We live in interesting times.....so interesting it's getting beyond my level of comprehension or pay grade....Keep up the good work....maybe someday precious metal longs and honest citizens will be rewarded

Paul Campeau · Aug 1, 2018 - 11:35am

Wasn't able to listen last night. Did they record ?

Paul Campeau · Aug 1, 2018 - 11:40am

https://www.moonofalabama.org/2018/07/hawks-renew-their-attacks-on-north...

This is the problem with an entrenched Warfare Welfare Economy run on fiat controlled by a handful of Banks. How does one even begin to break the model ?

Paul Campeau · Aug 1, 2018 - 11:43am

John is traveling in Asia.

· Aug 1, 2018 - 11:52am

Comex gold and silver lucky to only be down a little bit on a relative basis...but maybe not for long. Be careful.

canary · Aug 1, 2018 - 12:00pm

15% down after positive report...Am I missing something?

https://www.proactiveinvestors.com/companies/news/201958/gold-resource-second-quarter-results-driven-by-increased-gold-and-silver-production-201958.html

They seem to stay away of shorting KL...Why?...Maybe the shares undergoing accumulation?

· Aug 1, 2018 - 12:01pm

There will be fedlines today at 2:00 pm ET. No one is expecting much as it's an in-between meeting and the next drama of a FF rate hike isn't expected until September. 

However, you never know...https://www.nytimes.com/2018/08/01/business/economy/federal-reserve-inte...

Mark Dreyer · Aug 1, 2018 - 12:02pm

The above commentary makes sense, The market action, the COTs, all point to how we thought it would end.

Yesterday's article by the Frenchman, 'someone is cornering the silver market to cause a silver shortage,' agrees.

We have known for years that we have a silver shortage. We have known for years that J P Morgan has a corner on the silver market.

The part I liked was when the market blows up silver has a daily collar of $12.00. Cyrille says that would prevent a price fix. Without a price fix, silver could not be bought or sold. He thinks this could happen 10 days in a row. Silver would go from $16.00 to $136,00.

How would you like to be holding some silver futures contracts when that would happen? I have long thought that the most dangerous place in the world is being short silver.

lakedweller2 · Aug 1, 2018 - 12:13pm

Wbose algo is run on the US markets that maintains the CNY/gold relationship. Does China run an algo or ESF or hedge funds or central banking? How can China alter US pricing of PMs without US help?

Dobocop · Aug 1, 2018 - 12:33pm

third paragraph before the last set of bulleted points.

did you mean to write yuan-gold peg took over June 15 instead of yen?

cheers

Dobo

Cristobal Alvarado · Aug 1, 2018 - 12:48pm

No matter.

Great analysis. And for like 35 cents a day.

https://m.youtube.com/watch?v=V8lT1o0sDwI

lakedweller2 · Aug 1, 2018 - 12:49pm

Good question on GORO. Looks to me they made significant improvements across the board, but what do I know. Reacted like Novo. Every time Novo puts out any information, they sell the news. Value of the news is moot to traders. Glad to see Novo start up today....hopefully due to KL. Hopefully some scumbag analyst will report his thinking Live From Disney world, explaining why GORO needed a 15% hit other than Central Bankers wanting it in their portfolio at a cheaper price.

lakedweller2 · Aug 1, 2018 - 12:56pm

I messed up yesterday and used yen instead of yuan and probably helped confuse things. Just follow TFs wisdom. Sorry if I confused things. If no one read it or recalls it....great. 

Dobocop · Aug 1, 2018 - 12:58pm

I fixed it and the Sprott editors caught it, too.

Cristobal Alvarado · Aug 1, 2018 - 12:59pm

Lingering impact of vacation ending on a Monday.

onesong · Aug 1, 2018 - 1:17pm

oh never mind... it won't help anybody. Maybe I'm just having a swallowing disorders with all the crap floating in my cup. Sorry!

· Aug 1, 2018 - 1:19pm

This from SRSrocco fits with today's post, too: https://www.sprottmoney.com/Blog/top-gold-miners-production-declined-15-...

Craig Francis · Aug 1, 2018 - 1:23pm

China is much weaker economically than most realize, with extreme levels of debt and a faux growth rate of 8%. Tariffs will hurt them much worse than us because their economy relies on selling to the US with half a trillion trade surplus. We are far more robust an economy in that regard

What China can do is use their trading desks to rig markets. What would work nicely to that end. Using their trading abilities to manipulate the price of gold, something they desire in 1000 ton tranches, hoovering up this yellow metal faster than it's being mined. India is buying 1/3 of the entire annual production of silver so they're set for that commodity.

This assymetrical warfare gains them a substantial advantage because they can off load their $1 trillion plus in US treasury holdings to buy gold until there is little left in the west. If China's manipulation can drive gold to $1,100 or lower they have accomplished a vitally important element of their asset acquisitions.

I sold JNUG and NUGT to acquire DUST---now up just a bit. The plan is to exit DUST when gold price turns and use the proceeds to acquire my badly beaten juniors that will be resuscitated when gold turns upward. It might be 6 months before gold turns upward, or maybe a few months. But the pressure appears to be weighing heavily on gold

IMO, it still has a way to fall. The trading monkeys are not yet done with their jobs

lakedweller2 · Aug 1, 2018 - 1:29pm

SRSrocco's article very timely. My first impression is that if mining costs increase and miners don't control price, then they ought to do a class action suit against regulators for allowing price suppression.

Turd Ferguson · Aug 1, 2018 - 2:07pm

Though CDG did bounce a couple bucks.

Now, watch for this in the next hour:

· Aug 1, 2018 - 2:10pm

I just don't know....

If what you are saying here is true, you are asking us to believe that the Chinese think and plan long-term and are willing to make short-term sacrifices to achieve their ends!

That is so un-American.

I want moar now!

JC · Aug 1, 2018 - 2:11pm

Keeps on chugging.

· Aug 1, 2018 - 2:14pm

You should be sure to read this: https://www.zerohedge.com/news/2018-08-01/caveat-emptor

Am sending it now to James, Alasdair and John to see what they say. Will keep you posted.

______________________________________________________________________________

edit: Here's the email reply I rec'd from Mr Turk at 3:28 ET

Hi Craig

This story is completely fabricated. We’ve completed a detailed check of current records and historical archives and can’t find a ‘Francis Reeves’ or a ‘Reeves Francis’ in our system.

In any case, the story itself does not ring true as to how we arrange delivery. There are a number of holes in it. The person who wrote it does not understand our delivery processes.

For the record, I’ve never heard of Christoph Grizzard or “The Fat Cat Investor”. The domain was registered last year, and the site appears to be a scam site. 

There’s no email address or phone number listed. The only contact info is Fat Cat Investor, Kung Kok Street, Wanchai Hong Kong. However, according to google maps, there is no Kung Kok Street in Wanchai. There is one on Sha Tin, which is far away in the New Territories. So this looks like it could be a sophisticated scam site. 

Regards

James

Frank Pipgras · Aug 1, 2018 - 2:29pm

This does not smell right regarding James Turk. If true, Turk is out of business today. If not true, Mr. Fat Cat Investor is going to be seeing the lawsuit of his life.

Paul Campeau · Aug 1, 2018 - 2:32pm

Wow. I'll wait to hear the reply. 

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Key Economic Events week of 6/11:
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Key Economic Events week of 6/4:
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Key Economic Events week of 5/28:
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Key Economic Events week of 5/21:
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Key Economic Events week of 5/14:
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Key Economic Events week of 5/7:
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Key Economic Events week of 4/30:
4/30 9:45 ET Chicago PMI
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5/1 9:45 ET PMI and ISM Mau Idx.
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Key Economic Events week of 4/16:
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Key Economic Events week of 4/9:
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Key Economic Events week of 4/2:
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