PM Daily Market Commentary - 7/29/2013

By davefairtex on Tue, Jul 30, 2013 - 1:01am

Gold finished the day down $5.70 on average volume to 1326.20, while silver was down $0.20 to 19.79, once again underperforming.  This moved the gold/silver ratio moved to a new cycle high of 67.03.  Gold remains at the 50 day moving average.

The dollar was also flat today, as was the rest of the commodity complex.  Likely this lack of movement was due to the upcoming FOMC meeting starting Tuesday and ending with the release of the minutes on 1400 EST Wednesday.  Usually the release of FOMC minutes is accompanied milliseconds later by some high volume computer-generated trading spikes sometimes $10 or more in either direction - and sometimes first in one direction, and then another.

Apart from the FOMC, there is a lot of potentially market-moving economic news coming out this week: Tuesday a case-shiller home price index update, Wednesday first look at 2Q GDP numbers, and on Thursday we get jobless claims and various manufacturing index results.



davefairtex's picture
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GLD vs SLV smoking gun

So I sat through a 25 minute video by Mike Maloney talking over skype with Grant Williams where we got to see various slides and hear about gold leasing by central banks, the Bundesbank repatriation request, and finally the drawdown in GLD inventory we all know about by now.  The claim is that GLD's gold (more or less) went to fund this request.  Others have argued that GLD's drop was due primarily to the drop in gold price.

The interesting bit of new circumstantial evidence came when they compared the drawdown in SLV vs the drawdown in GLD over the same timeframe.  Presumably, if low prices sucked gold out of GLD, it should also suck silver out of SLV.  Yet they claimed there WAS no drawdown in SLV.   I had to check this out...

Sure enough.  Over the time period Jan 2013-present GLD tons decreased from about 1350 to 930.  SLV tons increased from 10,000 tons to 10,400 tons!  Even if you move the timeframe forward to Feb 2013, the decrease in SLV is miniscule (200 tons - about 2%) vs the drop in GLD (430 tons - about 31%).

So was the gold withdrawn from GLD in order to satisfy a call from a Central Bank (The Fed) for gold in order to return it back to Germany?  Or was GLD's gold withdrawn to make money on premiums on physical gold in Shanghai?  We don't know.  My speculation is, its likely a combination of both, since that move down in GLD inventory is now seen as clearly "unnatural" using SLV as a comparison.

In addition, from the standpoint of "cui bono", this would seem to lend credence to the claims that the April gold crash was specifically engineered - an opportunistic attack on a weak gold market - in order to get the bullion bank gold borrowers out of their short futures gold positions as well as freeing up the gold inside GLD for leased gold repayment.


Rob P's picture
Rob P
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Once again

great, clear headed, analysis.     I think that the evidence appears to be mounting.

I just watched that film with those two bugs.

OK, a lot of inventory on the Comex and GLD is going down, silver isn't (But is that unusual, and does it indicate manipulation with certainty?). Don't know who's really behind all this, but they must be pretty big.  And, we don't really know where the gold is going with certainty. 

OK, Dave, I would really like to hear your opinion on what a default or some other critical shortage would look like AND what the ramifications would be. How would  this turn into a crisis and much higher prices?  Won't someone intervene and force a cash settlement?  Or will it set off some sort of hysteria, or what? I never hear that part articulated much.

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Is the Shanghai Gold Exchange an important gold bullwhip?

Dave and all,

Just woke up at 5:45 a.m. Western Europe time, which means it's 11:45 in Shanghai and the SGE has been open since 10:00 a.m. China time.*  (According to its own website, the SGE is open for trading from 10:00-11:30 a.m. and after lunch from 13:30-15:30.)

It appears from the price chart there that both gold and silver jumped in price at about 10 a.m., the time when the SGE opens.  I only started looking at this site a few days ago, after Dave's comparison of Shanghai gold prices with Western gold prices, and so I have very little understanding of how the price tends to fluctuate in the SGE.

But, I am wondering if, in general, the PM prices rise when the SGE opens and then tend to fall after the SGE closes, right around the opening time of the COMEX.  

I realize that there are many other reasons that gold could rise besides that it appears to be very much in demand in China, but I am still wondering if an important part of the tug of war between the bulls and bears in the gold price is China's steady morning bullwhip.

I'd love to hear what people think.

Cheers,  Hugh

*Fun fact: China has only one time zone.  

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gold in asia today - spike to 1339.70

Gold in asia today popped at 1040-1045 JST for reasons currently unknown to me.  It hit 1339.70 on two high volume spikes and then backed off to its current level of 1331.  Most likely it was driven by some sort of news but I haven't been able to find anything material.

I haven't done any comparisons of how COMEX gold price is affected by the Shanghai prices intraday.

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SLV/GLD, COMEX, musings on gold leasing & GLD

Just based on the charts, SLV and GLD inventory seemed to track each other pretty well for quite some time.  And then recently, they've diverged significantly.  This happened a month after Germany asked for its gold back.  In the meantime, Shanghai bounces between premium and discount - I think its quite possible some of the gold went there during times of premium, but just based on how the Shanghai premium/discount chart seems to track price movements, it doesn't match so well with GLD's steady move downward.   I'd say its "explanatory power" wasn't quite as good.  And given the SLV/GLD divergence, and the fact that we know gold leasing takes place from Central Bank to Bullion Bank, and that the process makes the bullion banks money (its a form of "carry trade"), and that the Central Banks are most likely demanding some of that gold back - the Great GLD Robbery (!) is a story that seems to fit the facts.  Perhaps not to a "beyond reasonable doubt" level of proof, but I'd definitely say "more likely than not."  And to me, the SLV/GLD divergence pushed me over the edge because it helped eliminate some alternate explanations.

Lately I've been musing about GLD, and gold leasing.  Gold leasing is all about converting central bank gold into cash, then dropping that cash somewhere that makes money - such as (say) leveraged investments in emerging market bonds in Brazil paying you 9% on your money.  1 billion in gold [23 tons] turns into 1 billion in cash, which is then leveraged 10:1 to buy 10 billion in Brazil debt, paying 9% x 10 or a 90% ROI on your billion dollars in leased gold, for which you pay 0.2-0.4%.  Now that's real money!  Of course you have to hedge the whole thing against currency risk, and gold price risk, and if the central bank wants its gold back, the whole thing needs to be unwound.  But that's why you make the big bucks at the bank, you can structure a trade that makes this all work out.

So how do the bullion banks take leased gold and convert it to cash?  Well they can sell it on the open market, but that will really hammer the gold price because we know the physical market isn't that huge.

In this fantasy world of mine, GLD is the vehicle for easily converting Central Bank gold into cash and back again.  Its especially convenient because the bullion banks are the only ones with the keys to the GLD kingdom so nobody else gets to snatch that gold out of GLD but them.  And we know how well banks work together on such projects when it makes them money.

So then in this world of mine, a majority of GLD inventory is actually central bank leased gold.  What's more, the gold didn't actually leave the vaults of the central bank, but rather is just a bookkeeping entry.  In other words the Fed/Treasury is one of those third party depositories, and that the raid on GLD is simply moving numbers around on a spreadsheet.  This week it's the Fed's gold, next week it's inside GLD, the week after it is "back at the Fed" but it doesn't actually go anywhere.  Maybe that's 75% of GLD's gold.  (I'm picking these numbers out of thin air, btw).  No fraud has taken place, nobody gets prosecuted if the secret gets out, and in the meantime, everyone gets rich.  And - the administrator of GLD gets to charge 0.4% per year for maintaining the spreadsheets!

So a smaller amount of GLD's gold is available to fly off to Shanghai, but the vast majority is not - perhaps some is even the Bundesbank's gold in FRBNY, leased to GLD, and perhaps has now been mostly unleased back by the GLD robbery.

Now then, COMEX gold appears to me to be more unencumbered - likely, its real bars sitting in a real warehouse somewhere.  So if the COMEX does default its an excellent indication that there is no "free gold" inside GLD, given how easy it would be for one of the participants to theoretically raid 6% of GLD to refill the COMEX back up to full again.

And what happens on a COMEX default?  This assumes the COMEX just wakes up one morning and says, "GC contracts will now be cash settled" presumably concurrent with the inventory at COMEX being close to dry.  Its one thing for AMRO to do this, its quite another for a commodity exchange (presumably whose business it is to exchange commodities) to do so.

Longer term, business likely leaves COMEX.  COMEX will lose credibility, since there is nothing that grounds the gold price with actual requirement to deliver the metal.

At the moment it happens, the widespread perception would be that there is a gold shortage, and that perception would be gold-price positive.  [Nobody would stop to think "hey, there is 174 kilotons of gold out there...nobody is gonna die if we don't get some today" - that's not how markets go.]  Were I one of the big players, I'd use that news to launch a massive long-side attack on the shorts in mining and other gold-related places.  News is often the pretext for things like this.  If I were a short, I'd cover immediately.  The risk of uncertainty would just be too high to remain short, since this is an event that hasn't happened before.  Premiums would likely blow out as well.   So - I think for sure we get Jim's $100 day.  My gut says - it probably pops $100 in the initial 5 minutes.  Lots of blood in the streets, cheering by goldbugs everywhere, etc.

Its also possible that people will start to doubt gold inside GLD; perhaps GLD trades at a discount to NAV.  Or, maybe not.  Its a perception thing, and I'm not sure how that would play.

Most of the move comes from big players seeing it as a really amazing chance to make a truckload of money by hammering the shorts at a moment of their greatest fear.

Of course this reaction occurs only if the COMEX default is unexpected.  If the insiders saw it coming, likely gold will be bid up well in advance of the event.

So if I were in charge of the alleged gold price suppression conspiracy, I'd want to make sure a COMEX default (shall we call it the goldbug dream-come-true event?) never happens.  Likewise, if I were in charge of the business unit at COMEX, I'd also do my very best to make sure this never happened too.  So if a default does happen, likely there's a) no gold suppression conspiracy, and b) likely also that there's no free gold inside GLD.  The GLD allegedly has 930 tons of gold - and we can't find 30 tons for COMEX?  Really?

I know that's a negative answer rather than a positive one, but that's the best I can do.


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