PM End of Week Market Commentary - 2/5/2016

davefairtex
By davefairtex on Sat, Feb 6, 2016 - 6:08am

On Friday, gold rose +18.10 to 1174.10 on very heavy volume, and silver was up +0.16 to 15.03 on heavy volume.  Market-moving event today was the Nonfarm Payrolls report, which had a weak headline number but a big rise in average hourly earnings.  Gold initially sold off, then rallied hard into the close.  It appeared that nobody wanted to be short gold going into the weekend.  Since the dollar rallied strongly too, gold's big move higher on Friday was especially impressive.  Silver followed gold, but was substantially less enthusiastic, as has been the case now for several months.

On the week, gold rose +55.70 [+4.98%], silver climbed +0.77 [+5.44%], GDX shot up a crazy +19.99%, and GDXJ rose +14.20%.  Platinum was up +4.74% and palladium rose +0.93%, while copper climbed just +1.38%.  Gold and the miners did incredibly well this week, with silver and the juniors following along behind.  This isn't your standard PM rally, but the steady, strong bid for gold is undeniable.

This week after two days of hesitation at the 200 MA, gold broke sharply above the 200 and rocketed higher for the next three days, with the heavy volume in tandem with last week's COT report indicating that the shorts are being steadily squeezed out of the market.  On Wednesday and Thursday, a plummeting dollar helped propel gold skyward, but even on Friday when the dollar finally rallied, the shorts seemed so terrified of what might happen that they covered rather than be short going into the weekend.  The $15 rally in the last hour of trading on Friday suggests this, anyway.

Gold is approaching its previous high at 1191.70 - at the current $20/day rate of climb, gold will be testing this level Monday.  Now I don't really believe we'll have another $20 day come Monday; its hard to know just how many shorts remain after the last three days of price action, but this is why I have been saying that "the COT report shows a bullish stance for gold."  Once the commercials get those shorts on the run, this is exactly the kind of move that happens.

All that said: gold is now extremely overbought: RSI-7 is 88, which is a very high reading, and usually suggests a top is coming soon.  Now is a high risk time to buy gold.  Price at COMEX could keep rising, but corrections off these sorts of near-vertical moves can be vicious.

While silver has been generally following gold higher, silver's recovery from the seemingly endless November sell-off has been not nearly so strong.  The right side of the "cup" for gold is almost back up to the rim, while silver hasn't yet reached its 200 MA - roughly halfway back to the previous high.  (Does that make silver's cup half-empty or half-full?  Feels more like half-empty to me.)

Silver's continued underperformance suggests the PM rally continues to be about a flight to safety; perhaps from China, Europe, Japan, the US - or maybe all of the regions combined.  Each area has their own reason to increase holdings of gold, and gold is in a particularly strong season coming up on Chinese New Year.

It really does seem like silver is being dragged reluctantly behind gold at this point.  I don't have a great deal of confidence we'll see silver bust through its 200 in the same way gold did.

Miners

After consolidating above the 50 MA, the miners screamed hgher this week - GDX rose an incredible 18% in three days, blasting through the 200 MA and causing the shorts to flee in terror.  GDX showed strong buying towards the end of day on Friday, just like with gold.  The GDX:$GOLD ratio is back - way back in bullish territory.  Volume in the last three days was immense.  We will have to start looking at the weekly chart to see what's next.  Although I slapped a "no more shorts left" label on the chart, that is just a bit of hyperbole; I really can't say if there are shorts left or not.  But they certainly have had a terrible last three days.

On the weekly chart, GDX has clearly snapped its downtrend line, and has managed to close (just barely) above the middle spike in the "double bottom" reversal pattern - thus confirming the bullish double bottom by a slim margin.  Its an amazing move for one week; I do not think we should expect a repeat performance next week, but the miners have definitely broken their medium term downtrend by this week's price action.  A double-bottom is a strong reversal signal.  Long term, the miners remain quite cheap - although buying this high is probably not the wisest move as a short-term retracement off this near-vertical move could be substantial.

The USD

The currency wars took a surprising turn this week; the buck was hit hard, falling a big -2.60 [-2.61%] to 97.05.  Central bankers in Japan and Europe must be gnashing their teeth over this move, which unwinds their recent actions to devalue their currency vs the USD.  Yen rose +3.67% literally one week after Kuroda went negative, and the Euro was also up +3.28 to 111.58.  Commodity currencies were not so fortunate, with CAD rising just +0.42% and the AUD actually dropping -0.27%.  It looks to me that the flight to safety trade for the USD is unwinding.  My guess: the rest of the world is starting to figure out that US equities are vulnerable - especially the US banks given the low oil price environment.  If the US market continues to lose the support of foreign buyers - if money continues to flee the dollar - we could see quite the move lower in US risk assets.  That said - we may well get a bounce in the buck relatively soon.

It did astonish me that the yen has totally reversed all its losses and then some - but money didn't go into the Nikkei; instead, Nikkei sold off, down -3.99%.  Maybe some of that yen ended up in gold.  I can't see much of it going into JGBs.

US Equities/SPX

US equities have not been able to establish any sort of upward momentum following the clear swing low printed three weeks ago.  In fact, prices are now back to where they were following the bounce off 1812.  SPX dropped -60.19 [-3.10%] to 1880.05.  VIX rose +3.18 to 23.38.  My computer is short equities.

Looking at the sector map, we see gold miners in the lead, along with basic materials and utilities.  The map looks pretty negative; you never want to see consumer discretionary at the bottom and utilities at the top, if you are long that is.  Last week we saw something roughly similar; utilities were near the top last week too.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Gold Miners GDX 19.99% -24.49% rising rising falling rising ma200 on 2016-02-04 2016-02-05
Materials XLB 4.75% -18.54% rising falling falling falling ema9 on 2016-01-29 2016-02-05
Utilities XLU 2.53% -3.34% rising rising rising rising ema9 on 2016-01-22 2016-02-05
Industrials XLI 0.10% -10.75% rising falling falling falling ema9 on 2016-02-03 2016-02-05
Telecom XTL -1.49% -13.65% falling falling falling falling ema9 on 2016-02-05 2016-02-05
REIT RWR -2.13% -12.09% falling falling falling falling ema9 on 2016-02-05 2016-02-05
Cons Staples XLP -2.23% 1.31% falling rising rising rising ema9 on 2016-02-04 2016-02-05
Healthcare XLV -3.11% -8.29% falling falling falling falling ema9 on 2016-01-27 2016-02-05
Financials XLF -3.55% -12.20% falling falling falling falling ema9 on 2016-02-02 2016-02-05
Energy XLE -3.90% -29.42% falling falling falling falling ema9 on 2016-02-05 2016-02-05
Technology XLK -4.22% -3.80% falling falling falling falling ema9 on 2016-02-05 2016-02-05
Homebuilders XHB -4.59% -17.32% falling falling falling falling ema9 on 2016-02-02 2016-02-05
Cons Discretionary XLY -5.33% -3.64% falling falling falling falling ema9 on 2016-02-02 2016-02-05

Gold in Other Currencies

You can see the effects of currency moves on gold: since money flowed into the Euro and the Yen this week, gold in those currencies barely moved at all.  Gold in the rest of the world rallied quite strongly.  Gold in XDR was up +31.8, which cuts through all the currency clutter and tells us gold did well this week.

Rates & Commodities

Bonds (TLT) rose +1.31% this week, continuing to receive money flows as the equity market tumbled.  Market is telling us that it still believes in the US Treasury as a safe haven, but the rise in treasuries is also a continued sign of risk off.

JNK was hammered; last week's modest rally was sold, and JNK lost -2.23% and once again appears to be heading for a retest (and probable failure) of its recent lows.  Junk debt is signaling risk off.

The CRB (commodity index) fell -2.89%, a big loss.  On the weekly chart, commodities appear to be chopping sideways along the bottom; they have yet to actually recover in any meaningful way.

WTIC gave back last week's rally and then some, dropping -2.74 [-8.12%] to 31.00.  The swing low from three weeks ago is not invalidated, but oil is having a difficult time actually moving higher off that low.  This week we saw 4 moderately heavy down days, and one very strong up day.  With all the back and forth, I can't sort out the directionality myself, but my computer is back to being short oil.  Oil equities look mixed; E&P has turned bearish, while oil services still look reasonably strong short term.

Physical Supply Indicators

* Shanghai premiums for the Au9999 contract fell -4.45 to -1.70 vs COMEX.  After the massive price gain, gold is now trading at a discount to COMEX in Shanghai.

* The GLD ETF tonnage on hand rose a huge +29.23 tons, with 698.46 tons remaining.

* Gold is back in backwardation, with the spread in the first two contracts now at -0.40.

* ETF Premium/Discount to NAV; gold closing of 1174.50 and silver 15.05.

 PHYS 9.15 -0.61% to NAV [down]
 PSLV 5.80 +0.30% to NAV [up]
 CEF 11.47 -7.32% to NAV [up]

In a fun note, Eric Sprott's PHYS just acquired GTU - the Central Gold Trust, taking GTU off our list of indicators.  This effectively allowed him to buy the gold inside GTU at a discount.  Shareholders at GTU benefit; at one point the GTU discount was -14% to NAV, back at the end of 2014.  The only losers that I can see are the managers of GTU, which no longer receive their 0.4% per year management fee.  It seems this is a vindication of the Sprott PHYS product structure.

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows no particular premiums for gold or silver.

* HAA big bar premiums are lower for gold [2.23% for 100 oz bars in NYC], lower for silver [3.55% for 1000 oz bars in NYC].  Silver Eagle premiums fell [18.67% in NYC].

Futures Positioning

COT report covers trading up through February 2nd.

During the coverage period, the gold commercials added +18.6k shorts and also added +1.1k longs.  Managed money added +4.8k longs and closed out -7.4k shorts.  As of Tuesday evening, Managed Money still had a big short position, but this report doesn't cover what happened during gold's massive rise higher on Wed-Fri, so we'll really only know next Friday where things stand.  Most likely, managed money has bailed out of a huge percentage of their short holdings.  I would not be surprised to see a 30k drop, and that would put managed money at or near a cycle turning point.

One note: the overall commercial open interest rose rather than fell this week; it appears that the commercials aren't fleeing COMEX after all.  At least, they weren't doing so this week.  To me, this increases the chance of a standard gold cycle - with commercials unloading short and (more or less) causing the top once the stock of managed money shorts have been exhausted.  If things play out in the usual way, the top of this latest cycle is probably not too far in the future.

Silver commercials bought +1.7k longs and also added +2k shorts.  Managed money was mostly unchanged.  Not much change in the COT report for silver; price fell during the coverage period.  As with gold, we have to wait until next week to see how things changed during the three-day rally.

Moving Average Trends [9 EMA, 50 MA, 200 MA]

Miners leading the metal is what we like to see in a bull move for gold, and that's what we are seeing now.  Much of PM is now over the 200 MA.  Next step is a "golden cross" - but that is likely months in the future.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Senior Miners GDX 19.99% -24.49% rising rising falling rising ma200 on 2016-02-04 2016-02-05
Junior Miners GDXJ 14.20% -22.45% rising rising falling rising ma200 on 2016-02-05 2016-02-05
Silver Miners SIL 12.10% -35.60% rising rising falling rising ma50 on 2016-02-03 2016-02-05
Silver COMEX.Silver 3.76% -14.06% rising rising falling rising ma50 on 2016-01-25 2016-02-05
Gold COMEX.Gold 3.71% -8.26% rising rising falling rising ma200 on 2016-02-03 2016-02-05
Platinum COMEX.Platinum 3.34% -27.87% rising rising falling rising ema9 on 2016-02-03 2016-02-05

Gold Manipulation Report

There was no "after-hours" spikes to report.

Summary

After swing lows in many things, commodities, oil and US equities continue to struggle.  Gold rose sharply, and the miners simply screamed higher, like a cat being chased by a very big dog.  Silver isn't keeping up, likely held up by no joy in oil and commodities.  Bonds and junk credit continue to suggest a general "risk off" longer term pattern.

The gold/silver ratio fell slightly, down -0.34 to 78.12.  It remains quite near the highs - this continues to confirm the whole flight to safety thesis.  GDX:$GOLD rocketed higher, and is clearly back in bull mode - almost bullish on the weekly chart as well.   GDXJ:GDX fell sharply, and is quite bearish now.  This is a sign of "risk off" in PM.

COT is still somewhat bullish for gold, but the report lags by three days - a critical three days this week, since gold rose $44 during that time.  My guess is, if an up-to-date COT report were available, it would be suggesting that a gold turning point is approaching.  This week's large rally has most likely squeezed out most of the managed money shorts.

Gold and silver big-bar physical shortage indicators show a mixed bag; in the west, ETF premiums were higher - PSLV even moved into premium - GLD tonnage rose quite sharply, and gold moved into backwardation at COMEX.  However, big bar premiums for gold at HAA were lower.  In Shanghai, premiums turned into discounts: -1.70 vs COMEX.  High prices have made the Chinese less enthusiastic - the demand right now is all in the west, but not for physical products, for paper ones.

In spite of - and also because of - the large moves in the miners and gold, I believe a reversal is probably in the cards for the near term.  We need to be careful not to imagine that gold's rally is all about some massive shortage somewhere about to break.  If that were true, premiums would be blowing out, and that's just not happening.  It is more likely that this is about a normal "gold cycle" of the sort encouraged and shaped by the commercials.  We can't know this for sure until we get the COT report next week, but by then the market might well have moved already.  When RSI values get into the high 80s, its time to be careful, not reckless.  A bounce in the buck might be the catalyst near term.

Still, its probably best to wait for price confirmation before putting on your hedges.  The market could surprise me and break above that previous high at 1191.70.  You just never know.

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36 Comments

Oliveoilguy's picture
Oliveoilguy
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Felix Zulauf on the current trend

Great interview with Zulauf. Puts the current week into perspective. Good analysis of China, ZERP, and a target for Gold.

http://kingworldnews.com/felix-zulauf-2-6-16/

 

davefairtex's picture
davefairtex
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Don't Rush the Monkey: Pickens on Oil

TBP projects the low for oil was likely 26 and change, we will bump along the bottom until the surplus is eaten up, and that shouldn't be too far in the future.  In 1986, he points out we had a surplus of about 15 million bpd, and now the surplus is only about 1-1.5 mbpd, rig counts are down from 1600 down to below 500.  It will take a bit more time to eat through the surplus (and decrease production) - but it will happen, and its not too far away.  He projects a doubling of prices within 12 months of the low.

US production has declined from 9.7 to 9.2, and it will decline further especially with the low rig counts.

At the end of the piece, he counsels us all not to worry, we'll get price back up to 50-60 by end of year; he suggests that we "don't rush the monkey, and you'll see a better show."

http://www.cnbc.com/2016/02/01/pickens-oil-already-bottomed-heres-whats-next.html

Apparently he has a lot of these sorts of quotes, found here:

http://www.quoteswise.com/t-boone-pickens-quotes.html

The piece is worth watching, just to hear him say the line in that Texas accent.  I hope that when I'm his age, I have half his energy...

davefairtex's picture
davefairtex
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Lagarde: "China can avoid hard landing if..."

This is mainstream economic thought at its best.  China has issued massive quantities of debt, and the stuff that was bought with all that debt is completely unable to meet the payment stream of said debt.  All those debtholders expect to be repaid, with interest, but there is no productive mechanism underlying all that debt that can possibly meet those P&I payment streams - i.e. it is not self-liquidating.  Right now all the new debt is mostly used to repay the old debt, plus the interest.  That's very clearly the "ponzi phase" which as we know by now, always ends badly.

The current economic thought is, "reform, make your economy more efficient, and you can grow your way out of the (ponzi) debt problem."  Michael Pettis says that this has never, ever, worked in the past, especially not for the "economic miracle" nations, and so is unlikely to work for China.

Lagarde epitomizes the old way - what Portugal, Spain, Italy, and Greece have been advised to do.  If China selects this route, a disorderly default (or a money printing outcome) is more or less guaranteed.

Only 3 ways: default, monetize, or sell state assets and repay.

http://www.cnbc.com/2016/02/05/imf-honing-tools-to-rescue-ems-from-china-spillover-md-lagarde-says.html

China can avoid a "hard landing" if Beijing pursues reforms to state enterprises and sticks to a more market-driven and well-communicated exchange rate policy, International Monetary Fund Managing Director Christine Lagarde said on Thursday.

We must carefully watch which methods China selects.  If you keep hearing them select the "reform" path, then buckle up, its gonna get rough.  Either a massive move lower in currency via debt monetization, or an economic collapse through disorderly default are the only two possible outcomes.

China's bondholders and depositors are no different than bondholders and depositors from anywhere else inthe world.  They all expect to get their money back.  If they get it back, it will only be via monetization.  If they don't, then that's a disorderly default.

And the decision point is not far ahead...

davefairtex's picture
davefairtex
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harping on China

The reason I keep harping on China is that the amount of China's private debt is almost as great as the United States, their credit growth rate is 2.5 trillion dollars per year - twice that of the US - and once that credit growth is removed from the world stage, it will shake the foundations of the global economy.

We imagine things are looking iffy now.  All we need to do is remove China's debt growth and it will seem like the world has literally come to an end.

In terms of the four major economic powers (US, Europe, Japan, China) - China accounts for literally 66% of private credit growth.  The US is the other 33%.  The rest of the areas are contracting.  As credit growth goes, so goes GDP.

So I'm watching China.

Penny551's picture
Penny551
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I'm sure they will figure it

I'm sure they will figure it out. I have to get back to the Kardashian marathon on TV. wink

 

Capt Debtcrash's picture
Capt Debtcrash
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Paper is unrealized physical demand.

Dave,

This comment did strike me as interesting.  “the demand right now is all in the west, but not for physical products, for paper ones.”  I believe that paper demand is just unrealized physical demand. When the well documented physical shortage covering the paper claims on the COMEX breaks, the paper demand will quickly become physical, possibly many times over. With over 500 paper claims to one ounce of physical the situation looks very precarious.

Discussion between Kyle Bass and the Head of deliveries COMEX/NYMEX:

Kyle: What if like 4% of the people want delivery.

Head of deliveries COMEX/NYMEX: Oh Kyle that never happens. We rarely ever get a 1 % redemption for delivery.

Kyle: What if it does happen.

Head of deliveries COMEX/NYMEX: Well price will solve everything.

Kyle: Thanks give me my gold

Full Clip

At this point a .2% redemption could cause a default.  The COMEX/NYMEX said a 1% redemption is rare not unheard of, so with this kind of physical coverage I would think a default is getting close to likely.

Thanks again Dave and great job.  Let me know your thoughts.

Capt.

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Nate
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Dave

Dave,

Outstanding posts on oil, gold, and China today.  We really appreciate your efforts on this site.  I'm not interested in many of the 'gee whiz' issues discussed on this site - simply looking for a decent entry point for new money in the energy and gold space.  Feels like we are in that zone at this time.

Nate

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davefairtex
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paper demand = unrealized physical

Captain DC-

I believe that paper demand is just unrealized physical demand. When the well documented physical shortage covering the paper claims on the COMEX breaks, the paper demand will quickly become physical, possibly many times over

I agree, I feel that you could take the total open interest at COMEX in the GC contracts, multiply by 100, and thats the number of ounces of physical demand that would relatively rapidly hit the physical markets if the COMEX were ever to shut own.

And - now that I think about it, it probably would probably be larger than that number; there's nothing like the prospect of not being able to get something that encourages humans to run and try to buy it.

Last I saw, it was around 1200 tons of paper gold demand, or slightly less than double the size of the GLD.

The problem is, if you believe in the whole gold suppression conspiracy, then the gang in charge of that suppression campaign would move heaven and earth to keep the COMEX operational.  Why on earth would they want all that paper gold demand turning into physical gold demand?  That would make no sense, they'd be shooting themselves in the foot.

You also have to consider the commercial operators.  They make lots of money by running gold up, and then down again, squeezing the shorts on the way up, shorting the crap out of the market at the top, and then hammering the longs on the way down.  Rinse, repeat.  If COMEX goes away, they can no longer play this game.  Ergo, COMEX must stay solvent for them to keep the gravy train operational.

 

Capt Debtcrash's picture
Capt Debtcrash
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paper demand = unrealized physical

Dave, 

Thanks for the reply, good discussion.  I guess the question is how many times have they already moved heaven and earth to keep the gravy train running?  How many Kyle Bass's are there out there, who just stop playing the rinse and repeat game, take their ball (gold), and go home.  Eventually, hard limits are reached as is discussed often on this site.  If you haven’t done it, watch the video of his explanation of why he took delivery of a billion dollars worth of gold, his rational is undeniable.

You explained the upside on the off chance there is a default, likely measured in multiple of initial investment, and what's the downside, 25%, maybe?  Simple risk to reward in my book.  I'm fascinated by traders and technical analysis, but I'll stick to a strict system of buying more as the price drops and less if it goes up based on average purchase price, a more aggressive dollar cost averaging if you will.  

Capt

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davefairtex
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the COMEX default

Capt DC-

How many people are Kyle Bass?  I think the answer is, one.

COMEX delivered 100 tons in 2014.   As long as that level of demand continues, COMEX won't have any problems - in much the same way as people aren't all demanding that their bank deposits be turned over to them in cash.

Once systemic confidence snaps, then COMEX will fail.  But I do not think trouble for COMEX will appear out of a clear blue sky.  Same with the banking system.  For the systemic issues, there is always warning - its only people who aren't paying attention that get socked for the loss.  Anyone with a large deposit in an Italian bank, for instance, is one of those people who just isn't paying attention.  17% NPL means, as Chris said in the podcast, means those banks are done - its just a matter of when the regulator will appear to resolve them.

Right now we're seeing some serious clouds over there in Germany.  We are starting to get some signs that DB isn't doing so well.  At this moment, I'd be a lot more worried about bank deposits in DB than I am about an imminent COMEX failure, especially if my deposit was over the 100,000 Euro limit.

If we saw premiums of the large bars starting to increase, I'd start worrying about COMEX too.

If you want to trade gold with leverage on a short time horizon, a GC contract is great.  If you want hold gold as an insurance policy over the longer term, its probably best to take physical delivery.  It just depends on what your goal is, and your timeframe.

I'm pretty confident I can blow out of any futures contracts and switch to, say, PHYS, when I sense a problem starting to develop.  For instance, if I see the premiums in PHYS start to seriously expand, and I see premiums of the big bars start to rise, and I see confidence in the system start to erode.  Or I see the commercials bailing out of the COMEX.  Sell GC buy PHYS, problem solved.

pinecarr's picture
pinecarr
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Question re buying PHYS when physical gold spikes up

Hi Dave-

   I have a question per your comment below (sorry if it is at beginner level, but it is truly something I would like to understand):

I'm pretty confident I can blow out of any futures contracts and switch to, say, PHYS, when I sense a problem starting to develop.  For instance, if I see the premiums in PHYS start to seriously expand, and I see premiums of the big bars start to rise, and I see confidence in the system start to erode.  Or I see the commercials bailing out of the COMEX.  Sell GC buy PHYS, problem solved. (bold mine)

   If demand for physical gold were to suddenly spike dramatically upward, such that physical gold becomes hard/impossible to buy, are you really sure you would be able to buy PHYS?  (And if I am misinterpreting your comment, please let me know).  I.e., isn't Sprott PHYS constrained to the amount of physical gold they already hold and/or are able to acquire, since it is allocated gold?  So, unlike an unallocated paper gold ETF, they can't just automatically create a new share for anyone who wants to buy it out of thin air, they have to actually have the physical gold in hand first.  And if they can't get any more physical gold, how can they sell any more PHYS to buyers such as yourself?  Or does Sprott have some big pool of his own gold that he can allocate to new PHYS purchases in such a scenario?  (But even so, it seems like the cost would skyrocket in parallel with the physical price?)

   Or are you assuming that you would be able to sense the spike up in gold fast enough that you could sell GC and buy PHYS before physical gold becomes unavailable?

   Again, sorry if these are "beginner" PM-related  questions. But I'd really like to understand, as it impacts  decision-making on options for buying/holding PMs.

   Thanks!

davefairtex's picture
davefairtex
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buying PHYS, COMEX defaults, gold vanishing

Pinecarr-

The PHYS ETF owns a bunch of gold bars sitting in a vault.  Each share owns a fraction of a gold bar.  The fun thing about the PHYS product is, if you have enough shares, you can actually turn them in and have Eric Sprott (or presumably a minion) mail you the gold bar that stands behind those shares.

So - no, there is no printing up shares for PHYS, unless Eric Sprott goes out and buys more gold.  Which he occasionally does, when premiums get high enough on the fund.  This has happened in the past, and it generally keeps the premiums low, since for all the fuss about "gold being impossible to buy in volume", he seems to have managed to do just that.

PHYS shares are no different than shares of AAPL, IBM, CSCO, or BAC.  Mostly, the total supply doesn't change.  They just trade owners at the current bid/ask.  If there isn't any supply at the current price, the price rises until it "discovers" some more sellers.  That's what makes the premium increase for PHYS.

Now then, you make an assumption about gold being "impossible to buy" in the future.  Thought experiment.  Let's say there was no gold on the shelves at the retail shops, but I own gold bars, and you want to buy some gold bars.  Could you buy them from me?  Let's say you offered me a million dollars per ounce.  Would I part with my bars at a million per ounce?  Of course I would.  It probably would take a much lower price than that to get me to cough up my gold bars.

Indecent proposal theorem: there is (almost) always a price at which something will be available, as long as it actually exists.  Since gold is just a thing rather than some immeasurable state of virtue, and since there are 5.4 billion ounces floating around out there, you will never find a time when "gold is impossible to buy."  It will just have a high price.  Otherwise, it would be a simple matter to fly to (say) asia, buy some in a shop - or from a local, fly back, and then sell it for substantially more than you paid for it.  But for the buyer, it would still be available.

The whole canard about "gold running out" is a load of crap put out by gold promoters trying to get you to buy through fear.  All that will happen is the price will increase.

As you say, if supplies of gold at retail runs low, same thing will happen with shares of PHYS.  Premiums will explode higher.  The shares will still be available - for a price - probably higher than you or I would want to pay.  And that's when I want to already be the owner of PHYS shares instead of GC contracts.  I want to be in a position to sell my PHYS for a premium - a hefty premium - to a buyer desperate to own gold.  There will be no premium for GC contracts at that point. 

But my key assumption is, premiums won't jump from -0.60% to 100% in a day.  I believe it will be a gradual thing.  Just like what happened with CDS in 2008, or the price of bank stocks like DB are doing now.  DB doesn't go from "normal" to 0 in one day.  Market gets a clue, price gets sold for a while, mostly people don't notice (unless their name is Chris, who watches stuff like this and tells us about it), and then one day it just blows up and to everyone who wasn't watching, it is a big shock.  Readers of the blog here, if they are paying attention, would be wise move the bulk of their deposits out of DB and into something safer.  Like Bunds (currently yielding less than zero) or perhaps those gold bars we were talking about earlier.

If you read history, FDR's big gold devaluation in 1933 wasn't a shock either.  Specs knew about it for months before it happened.  Gold fled the US at $20, and then poured back in after the price shot to $35.  Read about it in Hoover's memoirs, he was beside himself at what President-elect Roosevelt was doing to the nation's gold-based money supply.  When gold fled the country due to speculation of devaluation, it was very deflationary - worsening the depression because it sucked currency right out of circulation at the height of the deflation, all to serve FDR's political purpose.

Attack at Pearl Harbor - not a surprise either.  Cut off oil supplies of an island nation engaged in a campaign of conquest with only 6 months of reserves, what do you think will happen?

Most of the historical stuff we see as a surprise really wasn't, if you were paying attention at the time.  I believe this will be the same.

Then again, I'm more of a trader.  If you aren't so interested in taking shorter term positions and trading GC contracts, it probably makes more sense to buy PHYS at the next dip so you don't have to watch things so closely... :-)
 

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HughK
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Grantham: This isn't the big crash

An interesting take on the recent downturn from Jeremy Grantham reported at Marketwatch here.

Grantham's newsletter here.

 

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Thanks Dave!

That's very helpful!  And I think your conclusion is right; for someone like me, who isn't a trader (and doesn't want to worry about watching things that closely), it probably does makes more sense to buy PHYS at the next dip!   ...Or cost average over time. :)

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Rinse and Repeat Vs Price Suppression

Dave

"The whole canard about "gold running out" is a load of crap put out by gold promoters trying to get you to buy through fear.  All that will happen is the price will increase."

It's the second part of your statement that's material.  Of course gold will not run out.  At some price you will always be able to acquire gold.  What are your thoughts on the open interest to registered gold increasing from what is historically below 100 to 1 to over 500 to 1?  You said there is only one Kyle Bass, but I think there are many who think like he does, and the ratio is much worse now than they were when he discussed them with the head of deliveries at the COMEX/NYMEX.

You make excellent points on the possible indicators, but sometimes, actually often, markets and anticipated indicators are wrong...very wrong.  

At one point you didn't believe in manipulation, but found through your own very good research that it likely did exist. Now you are assuming that the manipulation is simply for the monetary gain of the 'rinse and repeat' scam.  What if the rinse and repeat is merely a fee the commercials require from the powers that be to break the Greenspan thermometer/suppress the price of gold? 

If rinse and repeat is the motive for manipulation there is no limit.  It can be done just as easily in the hundreds as in the thousands.  Suppression, on the other hand, can have limits.

 

 

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registered vs eligible

Capt DC-

What are your thoughts on the open interest to registered gold increasing from what is historically below 100 to 1 to over 500 to 1?

There are some nuances.  First of all, its only the front month that matters for the purpose of delivery, not the total open interest.  Most holders of GC contracts roll before first notice day.

Secondly, some of the gold promoters pretend not to notice the "eligible" pile, which is about 180 tons the last I saw.  Is this gold truly available?  My guess (based on my indecent proposal theorem): yes, for a price.

And perhaps that's why the registered gold was pulled.  Shorts get squeezed - by the bullion banks, naturally, who own all the eligible, but will be happy to part with it - for a price above market.

Lastly, some number of shorts are miners with production hedges on.  They deliver on their shorts from their mining operations.  (Or in a relatively roundabout way via the LBMA - same game, just different location).

Here's how the scenario would play out, in my opinion.  Come first notice day, there are (say) 5000 front-month contracts short, and 5000 longs standing for delivery, with only enough registered to supply (say) 700 contracts.  After FND, those shorts either need to persuade the longs to sell, or by finding the gold somewhere - anywhere - to deliver to the longs.  And as I have said, there is a lot of "eligible" gold sitting right there at COMEX.

So - again, for a price - eligible gets turned into registered, and gets delivered to the longs.  Some amount is newly-mined gold.  Some amount gets bought out for cash by the shorts.  No default occurs, and problem solved.

So if price has to rise $1, or $5, or more to settle those front month contracts, it will.  Or perhaps gold will be made to appear by one of the special club members able to retrieve gold from GLD, and GLD will trade at a temporary premium to NAV.  Again, problem solved, without a default.

You make excellent points on the possible indicators, but sometimes, actually often, markets and anticipated indicators are wrong...very wrong.

Ok, since you say this happens often, I'll ask you to supply instances for when you believe the markets were very wrong about a major issue - when they showed no movement for weeks, and the very next day, the price gapped up 100% or some such.

Perhaps if we get enough examples of where this happens, we can come up with a category of things that the markets predict well, and categories of things that the markets do not predict well at all, and we can assess risk of a true "bolt from the blue" for gold and a COMEX default versus a more gradual 2000 or 2008 type crash.

I do find that individual equities can gap down (sometimes to zero) this because companies can have Really Unpleasant Surprises, but the larger sectors or markets generally do not behave this way.

At one point you didn't believe in manipulation, but found through your own very good research that it likely did exist. Now you are assuming that the manipulation is simply for the monetary gain of the 'rinse and repeat' scam.  What if the rinse and repeat is merely a fee the commercials require from the powers that be to break the Greenspan thermometer/suppress the price of gold?

I still do not believe in trend manipulation.  I believe in tactical manipulation, because while they can clearly wang the prices around in the near term, the ability to change the trend remains problematic.

Witness the recent downtrend in equities.  Do you imagine the Fed likes this?  If they had all-powerful trend-manipulation software and/or infinite money, would they simply not move the market back up to setting new highs?  Chris has said that the stock market is a critical signaling mechanism.  This should be job #1 - more important than gold, even - for any super-powerful manipulator.  But the equity market just looks ill right now.

Where are you when we need you, all-powerful trend-setting manipulator?

If it ain't there for equities, it most probably isn't there for gold either.  Again, they can clearly wang prices around short term, and they would certainly love to set prices of everything, everywhere, but desire clearly does not equal ability.  I still strongly believe the long term trend is independent of the attempts at (tactical) manipulation.

Of course, money printing isn't tactical manipulation - it is spending 4 trillion dollars and taking a serious position in the market, just like an "economic" participant.  That has definitely been successful in moving asset prices higher - but that's not some sneaky campaign, its very straightforward and in your face.  And even with that, when they talked about tapering, the grand manipulators ran into the "taper tantrum" when various holders of bonds decided to front-run the Fed and down went the price of bonds.

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PHYS

PHYS has a fixed number of shares, unlike GLD which can, "emit" shares when, "Gold" enters the trust from authorized participants, and is designed as a tracking fund.  PHYS doesn't track anything, it simply trades on supply vs. demand of shares, as Dave explained.  Not to say that PHYS could not be made to look bad by naked short selling.. but...     

     http://www.tfmetalsreport.com/blog/7428/gold-magically-flows-back-gld

Pinecarr's question is excellent IMO;

And if they can't get any more physical gold, how can they sell any more PHYS to buyers such as yourself?  Or does Sprott have some big pool of his own gold that he can allocate to new PHYS purchases in such a scenario?  (But even so, it seems like the cost would skyrocket in parallel with the physical price?)

Clearly, Dave is banking on the idea that someone who already owns PHYS shares is going to sell on the uptick, i.e. that the market for PHYS shares will have liquidity at higher prices... stated differently.. that someone or some entity will be glad to sell at higher prices.    

This assumption is at the root of my entire quarrel with Dave's approach to PM commentary here.  As Capt. Debtcrash suggests, suppression has limits.  Things can and do break at the limit.    

If you posit that the market is manipulated (I do), and that there ought be coming, reasonably soon, a moment whereby the, "man behind the curtain" is revealed, then you really do have to question whether anyone (including myself) would in their right mind would be willing to sell PHYS shares at that moment.  Dave is suggesting that he will be able to find a seller.  Maybe.  Remember, to buy PHYS shares in the heat of crisis you need to find someone who wants to convert Gold into Fiat.  Digital Fiat.     

Let's talk through the scenario, starting with some context in terms of the size of PHYS;

PHYS  holds 1.82M ounces of Gold worth $2.13B, broken up into 220.6M units.

2.2 M shares of PHYS worth about $20M traded on Friday, and that was more than 2X average volume.  In other words, 1% of the shares changed hands.        

GLD, "holds" 22.4M ounces of Gold worth $25.83B.

 

PHYS is arguably the safest way to own Gold as readily tradable shares in a normal IRA. 

Total IRA assets were reportedly $7.4T at the end of 2014.  Ref.   http://www.icifactbook.org/fb_ch7.html

PHYS = $2.13B, IRA's = $7.4T .... see the problem(s) here?

Who is going to be selling PHYS once things start to break in the Gold market?  PHYS is tiny compared to most other measures of Gold in the world... For gosh sakes, China added more than all of PHYS ($3.4B worth of Gold) to their reserves last month alone.  (Ref:     http://www.zerohedge.com/news/2016-02-07/number-everyones-been-waiting-c...).  PHYS is tiny, and the "float" as represented by the amount of shares that actually trade (vs. being help by strong hands, like mine) is tinier.  If 20 US millionaires decide they want to put a good chunk of their net worth in Gold via the safest tradable means... there goes the float.  There are 10.6 million millionaires in the US...  do you think 20 of these might find their way to PHYS as the SHTF?  Do I even need to calculate what percentage of US millionaires it would take to absorb the float?  OK, I will;  0.0002%.  

Dave argues for a scenario whereby there is continuous liquidity, at some price.  I would argue that this will not actually be the case - I think that when things break, nobody will be willing to sell Gold until the dust settles a bit.  Some PHYS shares will trade in the early hours of the crisis.. but then nobody will be willing to sell.  

Here's what SRS Rocco, aka Steve St. Angelo, said last week;   

So, something just isn’t right in the paper gold and silver markets.  I believe these charts are indicators that the coming collapse of the paper precious metals markets is close at hand.  I am not saying it will happen today, next month or this year… but the trends are heading in an exponential fashion.  Again… all exponential trends end in collapse… BAR NONE.

My fear is the collapse of the paper gold and silver futures markets may usher in a NEW DARK AGE.  There is plenty of rumor and conspiracy on the alternative internet that the powers that be are certainly planning something to cover up the disintegration of the U.S. Dollar Fiat Monetary System.

In all likelihood, the coming collapse of the economic and financial system will happen virtually overnight.  Unfortunately, investors who are still playing Russian Roulette in the broader markets may find out sooner than later, TIMING AN EXIT is folly.

Owning physical gold and silver out of the banking system is the best alternative to the madness that is coming.

https://srsroccoreport.com/indicators-show-collapse-of-the-paper-gold-si...

   

     

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Too close or too far

Dave, 

I appreciate the time you're taking today.  Your knowledge of the workings of futures market is beyond what mine will ever be.  I drill for the oil in the middle of the ocean, so it's far from my area of expertise, though I do devote much of my time to economic matters.  I think I have a pretty good head on my shoulders and I know you do.  I still feel as if my logic is sound, and I can tell you feel as if yours is as well.   I feel like we're both looking at a pothole, I think it's a big problem, and you don't see any issue.  I don't know who is right, are you too close to the problem, or am I too far.  Probably the latter, but I have to follow my gut.

Thanks again, 

Capt

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Penny551
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great dialogue

Just wanted to mention how much I appreciate the dialogue on this forum.  I don't think there's a forum of this caliber. 

i find myself somewhere in b/t Dave's position and that of JimH/Capt. Regarding PHYS and there being willing sellers, I think Dave will likely be right unless (until) the ""markets"" shut down. At that point, if you can't touch it, you don't own it. 

 

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Vigilance and precedence

My take is that Dave is betting that he will see what's coming in time to get out. For most of us that would be a real dumb strategy since few of us keep our finger on the pricing pulse so continuously or understand the interplay of forces so well. This isn't a black and white scenario for how best to manage things. Dave may be able to read the tea leaves in time to roll over to PHYS before the dumb money gets trapped.

If things seize up for gold because of likely or planned factors (e.g. COMEX gold stores or US policy changes) then I think Dave has a good chance of bailing before the gates get shut, depending on his risk tolerance for when to leave the bar. Counting on 'last call' being announced is dicey.

That said, if something geopolitical goes sideways things might not be so well telegraphed. Your likelihood of dodging the bullet changes a lot depending on whether you need a month, week, day, hour, or millisecond of warning. It Turkey gets stupid and Russia retaliates then the markets close near instantaneously. You might expect to see some sign of rising tensions before that (uhh, already happening...) so price signals might be present, however, if North Korea decides to loft an armed missile tonight in response to more UN sanctions (say at South Korea), Dave's screwed. Then again, maybe we all are.

Like all of us making preps we are left deciding what scenario(s) to prepare for. Dave is making his own bets, same as everyone else. Given his trading savvy, I suspect Dave is not unhedged regardless of how this plays out though.

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sand_puppy
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DaveF avoiding the reset

Hey!  Neo could do it.  I have faith in Dave.

Me on the other hand.....

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COMEX Default will never happen.

The constant discussion of the COMEX defaulting is a waste of time.  It will never happen.  As Dave stated below, the persons with the most interest in keeping the game going will not allow it to happen.

I had a long discussion regarding this exact scenario with Jack Sandner (Ex Chairman of The Board) back in 2010.  He stated that pseudo default has happened a few times in the past 30 years (at the time of my discussion).  Each time, they've just changed the rules in order to keep it from becoming an issue.  Can't go into detail....sorry.

Bottom line, it will never happen.  If it does, it'll be because TPTB allowed it to for their own reasons....Not Jacks words but, damn close.

 

davefairtex wrote:

Captain DC-

I believe that paper demand is just unrealized physical demand. When the well documented physical shortage covering the paper claims on the COMEX breaks, the paper demand will quickly become physical, possibly many times over

I agree, I feel that you could take the total open interest at COMEX in the GC contracts, multiply by 100, and thats the number of ounces of physical demand that would relatively rapidly hit the physical markets if the COMEX were ever to shut own.

And - now that I think about it, it probably would probably be larger than that number; there's nothing like the prospect of not being able to get something that encourages humans to run and try to buy it.

Last I saw, it was around 1200 tons of paper gold demand, or slightly less than double the size of the GLD.

The problem is, if you believe in the whole gold suppression conspiracy, then the gang in charge of that suppression campaign would move heaven and earth to keep the COMEX operational.  Why on earth would they want all that paper gold demand turning into physical gold demand?  That would make no sense, they'd be shooting themselves in the foot.

You also have to consider the commercial operators.  They make lots of money by running gold up, and then down again, squeezing the shorts on the way up, shorting the crap out of the market at the top, and then hammering the longs on the way down.  Rinse, repeat.  If COMEX goes away, they can no longer play this game.  Ergo, COMEX must stay solvent for them to keep the gravy train operational.

 

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Gold and Hyperinflation
Penny551 wrote:

Just wanted to mention how much I appreciate the dialogue on this forum.  I don't think there's a forum of this caliber. 

i find myself somewhere in b/t Dave's position and that of JimH/Capt. Regarding PHYS and there being willing sellers, I think Dave will likely be right unless (until) the ""markets"" shut down. At that point, if you can't touch it, you don't own it. 

Or during hyperinflation bad money chases out good money and gold is good money.  The only gold I would sell during a hyperinflation is for life essentials such as food and home.

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great stuff

Great points really by everyone.  I especially like LR's inside information - mainly because it agrees with my own intuition.  Ha!

Let me try to summarize.  For some class of problems, as Mark said, there is zero reaction time.  Saudi Arabia has an accident and goes offline, so a lot of stuff gets repriced (light sweet crude at the top of the list) faster than anyone can react.  What happens to gold at that moment?  It probably rises substantially.  But does that lead to a COMEX default?  I don't think so.  A major geopolitical event that still leaves the markets & banking system intact to react to it will just move prices around.  They might be discontinuous for a few seconds, and then they will probably oscillate violently for a time, spreads will widen, but it will all settle down.

Likewise, in a standard hyperinflationary environment, the banking system still works.  Even if the USD was chopped in value by 99%, I'd still find money useful.  I'd need to add a few zeros to everything, but I'd still use my VISA card to buy things, I'd have electronic bill pay, I'd get my dividends, pay off debt, and whatnot.  Everything would all still work.  And hyperinflation isn't a light switch that gets flipped one afternoon.  It is a gradual affair.  We will see it coming.

Even devaluations are relatively easy to spot.  A bunch of official denials, followed by the devaluation.  China's coming devaluation is a case in point.  Once the reserves run out, the jig is up.

A COMEX default is a special thing.  At its core, the default will require traders to come to a conclusion that their relatively short-term bets, if successful, might not be paid off.  Why play if you can't win (c.f. Illinois Lottery)?

So when does that happen?  I see two circumstances:

1) the contract becomes a cheat - COMEX price and the physical price diverge so significantly that the GC becomes useless as a hedge.  If GC stops tracking the real price of gold, that's it.

2) the banking system itself (the means of the bets actually being paid) is called into question.  If money wants to flee the banking system, COMEX is no longer relevant.

And for #1, even if the COMEX GC contracts are only cash-settled, that still works for a lot of people.  If gold is actually available for $5000/oz, and your GC contract gets settled at $5000/oz, do you care?  I don't think you do.  You can always buy the gold with your $5000.  Its only when GC is settled for something substantially less than the $5000 when you abandon GC contracts for physical.

There is the whole concept of gold-backing currencies.  I suspect if things start to get really chaotic, and I sense the chance of a disorderly default and/or some emergency remonetization of gold might be possible, I'll abandon GC for PHYS, just to be safe.  But again, those things don't just happen overnight.

Unless - someone wants to actually state an example where this happened in the past?  A good historical case is always helpful to prove a point.

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cmartenson
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Maybe this one time?
davefairtex wrote:

(...)

Unless - someone wants to actually state an example where this happened in the past?  A good historical case is always helpful to prove a point.

How about April 5th, 1933?

Of course, this is a bad example for the point you are making, because it means gold might be revalued suddenly via executive order making it illegal.  Hardly the sort of outcome any of us here would find fun or useful.

The only event I could imagine would be a sudden global collapse of the banking system and although that's reputed to have almost happened in 2008, it's something that has not ever happened so waiting for that to happen is like waiting for steel to vaporize in an office fire.

Wait...another bad example.  I mean something so rare it's never happened before.

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A different lens...

I see things differently.. certainly differently than Dave F.. and in the case of the above thread, differently than Logan'sRun, whose comments I value immensely.  

First off, I don't actually talk about Comex default myself.. I talk about things breaking.  As far as I am concerned, Comex has already defaulted in terms of it's connection to physical Gold supply vs. demand.  Things are going to break because we don't have real price discovery going on.  We don't know the real value of Gold right now because of this gross distortion.  It is this gap that DaveF refuses to acknowledge, and that I harp on over, and over again.  Why is there a gap?  Well.. let's tell the story in charts, OK?

1)  Relative to world physical demand, Comex delivers almost no Gold.. tiny amounts.  It used to deliver more.  DaveF says that because there is still a fairly large, "stockpile".. that Comex is still relevant.  That does not though heal or solve the fact that Comex is today almost completely untethered from physical demand.   

    

http://2.bp.blogspot.com/-MMY_xoDemdI/VqEIarAc8FI/AAAAAAABHOM/ZP5aIf5Kyj8/s1600/comexdeliveries.gif

Another thing to note, while discussing Comex deliveries, is that if you really look under the covers, you can see that the tiny amount of deliveries are actually just moving from one pocket to another, back-and-forth within the bullion banking system.  Even that tiny bar on the chart representing deliveries is not real for the most part;

http://www.tfmetalsreport.com/blog/7420/connecting-comex-dots

So, this obviously connects all of the dots. JPM stopped over 200,000 ounces of gold for itself back in December and, just today, they finally booked in the gold, having it sent over from the House Accounts of HSBC and The Scoshe. This still leaves two important points, though:

  1. Once again, the Comex delivery process is shown to be nothing but a Bullion Bank Circle Jerk where a bank takes delivery one month, only to turn around and issue the gold back out the next. Rarely does gold ever actually leave the Comex vaulting system and, today's action notwithstanding, rarely does it even move from vault to vault.
  2. Total Comex registered gold remains at all-time lows. Though some gold has recently been re-classified from eligible to registered as Feb16 deliveries begin, the total Comex registered gold vaults still hold just 145,000 ounces with 3,687 Feb16 contracts still open and standing, representing as much as 368,700 ounces of delivery obligations.

2)  Comex won't default.. it will simply become irrelevant in terms of global price setting for Gold someday.  This could easily happen overnight.  Anyone with half a brain can see that the price for Gold should be discovered in the Chinese markets - because that is where the (physical) demand is, and that is where the (physical) supply of the world is going;

 

http://2.bp.blogspot.com/-J2VBut93SOk/VqEIZ-OeqSI/AAAAAAABHOI/VLubBpOBpRI/s1600/cmevssge.gif

I mean really...  use your own brains, look at the above chart, and think about this for a bit.  What is a market.. what is it's function?  Here is a definition I picked up off the internet;

A financial market is a market in which people trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural products.

Can you look at these charts and tell me that the Comex paper futures market is reflecting a price that balances supply vs. demand for actual physical Gold?

Here's Dave's take on the Comex;

      And for #1, even if the COMEX GC contracts are only cash-settled, that still works for a lot of people.  If gold is actually available for $5000/oz, and your GC contract gets settled at $5000/oz, do you care?  I don't think you do.  You can always buy the gold with your $5000.  Its only when GC is settled for something substantially less than the $5000 when you abandon GC contracts for physical.

This is prima facie absurd.  One the one hand, I have already shown the reader quite graphically that Comex is already irrelevant, and yet it remains the primary mechanism for price discovery of physical Gold.  Dave is saying above that Comex could become even more disconnected, i.e. have no physical settlement.. just cash settlement, and that would be OK for most participants.  But what would it mean for the price of Gold?  The fact is, we are already there today..  Dave makes it sound OK, but it's not.

There is no market today that will tell you the real value of Gold.  You have to figure it out for yourself.  I won't put a number on it, but I will tell you that as a safe haven form of money, Gold is dramatically undervalued based on the distortions brought by the paper futures market and the banks that run it.  We have a commentator here at PP.com that will tell you that the price in the markets today is real..  I will tell you that it bears no relation to where the balance point between supply and demand actually is. 

The Chinese and Russian central bankers are not dumb... they know exactly what I am telling you here.  They are converting their dollar reserves into alternative forms of money.. i.e. Gold.  They are increasing their Gold reserves month after month.  At the same time, Western bankers are using their power over the pricing mechanism to propagandize you via the price, and to hopefully dissuade you from joining the East.  The current price discovery regime will break simply because Gold cannot be printed.  Price discovery will move East, where the demand lies.  This is inevitable.  I can't tell you how it will unfold.. only that it will come about.

This from Jesse's cafe Americain;

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting.  Got that?  My sitting tight!

Those who can both be right and sit tight are uncommon. I found it one of the hardest things to learn.”

Jesse Livermore              

 

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surprising events

Chris-

How about April 5th, 1933?

Making gold illegal went hand-in-hand with the devaluation; the devaluation was not a surprise (it was telegraphed for at least three months prior by various people close to FDR) but making gold illegal was definitely a surprise.

But the real money-losing position had to do with the devaluation, not with the confiscation.

Those that responded to rumors of devaluation and took gold out of the country did fine.  Those that bought foreign currencies in response to rumors of devaluation did well too.  Those that withdrew gold from their US bank and stored it at home did well too - they could always take the gold out of the country.  The devaluation was the "surprise event" that caused the losses, not the making of gold illegal.  Police didn't come searching door to door for your gold.  And as I mentioned, the devaluation was definitely not a surprise at all.

The only event I could imagine would be a sudden global collapse of the banking system and although that's reputed to have almost happened in 2008, it's something that has not ever happened so waiting for that to happen is like waiting for steel to vaporize in an office fire.

I do not think that the almost-collapse in 2008 was a sudden, surprising affair.  We had perhaps six months of warning; there were lots of warning from bank stock prices, junk credit, CDS, etc.

Capt DC suggested that "the market is often wrong" about projecting such events.  I really don't think it is.  It wasn't wrong in 2008, nor was it wrong in 1933.

If an asteroid hits the earth, or if an EMP blast takes out the US grid - ok, market most probably won't foretell that.  But a banking crisis?  I think we'll see signs.  A currency devaluation?  There too, I believe it won't be a surprise if you are paying attention.

In fact, the market is foretelling such an impending event in China right this very instant.

Capital is fleeing ahead of the devaluation - perhaps even causing it.  Capital flight might also be foretelling an impending private debt crisis too.  Will we pay attention?  Or will it be a gigantic "surprise"?

LogansRun's picture
LogansRun
Status: Diamond Member (Online)
Joined: Mar 18 2009
Posts: 1443
Jim, I understand your points.

I agree to some extent.  But, until the masses agree with you in regards to their irrelevance, your position won't happen.  And unfortunately, TPTB won't just allow their control to disappear...at least not until they've gained a power position in the Asian/Russian markets.  And as you know, they've been working VERY hard over the past 6-8 years to gain that power/position.  Our old friend Damon (Strabes) laid out an outstanding presentation on just this issue back in 2009 (Renaissance 2.0?)...wish I could find that again.

 

 

 

davefairtex's picture
davefairtex
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Posts: 5072
real prices

JimH-

While confidence in the system remains, people will prefer receipts over physical.  That's just human nature.  Its true for gold, and for bank deposits too.

Once confidence snaps, then people will prefer to have the real thing - both for FRNs and for physical gold.

Until confidence snaps, all your COMEX gold delivery charts and talk of "untethering" simply won't matter.  That's just reality.  You may not like it, but that's just where the vast majority of people are today.  And you get all cranky when I point this out, as if I'm some traitor to the cause by I point out the shocking fact that people just don't see things the same way you do, and right now, they outnumber you, and they all vote with their bank deposits.

Futures contracts with cash settlement work just fine.  Its how the e-minis work.  Oil has the QM contract, works great there too.  As long as confidence remains in the system and the settlement process, they will continue to work just fine.  That's because most people are fine with receipts.  It may not work fine continuously forever, but it works great at the moment.

Believe it or not, the world does not spend most of its time in a state of catastrophic failure.  Mostly, it works.

I won't put a number on it, but I will tell you that as a safe haven form of money, Gold is dramatically undervalued based on the distortions brought by the paper futures market and the banks that run it.  We have a commentator here at PP.com that will tell you that the price in the markets today is real.  I will tell you that it bears no relation to where the balance point between supply and demand actually is.

Oh yes, guilty as charged.  I believe that the price in the markets today is quite real.

Why is this?  Any time money changes hands for product, that's a real price.  And I can get real gold for that price, right here where I live - that price, plus the usual premium.  If the premium blows out, then the price progressively becomes less real.  Right now, premiums are normal, so the price is a real one.

If you are trying to say that the current market price appears to be reflecting an under-estimate of the chance of catastrophic failure, for which gold would be a reasonably good hedge, then I'll agree with you.  If you are saying that you project a strong likelihood that the market will assign a higher value to gold in the years to come, why, I'll agree with you there too.

But that doesn't mean that today's price isn't real.  If I can buy physical gold for that price - its real.  Kind of by definition.

sand_puppy's picture
sand_puppy
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Posts: 1763
Knowing what is happening and reliable predictions

Don't look now but Deutsch Bank is down 10% this morning.....

Summarizing:  DaveF feels that he can dance so close to the door and is of such nimble feet that he can dash through the door at the moment the building crashes down.  DaveF's financial experience and sophistication are orders of magnitude beyond my own.  So maybe he can.

2 problems:

1.  Rules will be changed

Remember how the rules get changed when TPTB need to change them.  During the protests in Berkeley CA a year or two ago authorities shut down the BART line and shut down the cell phone network for many hours to make it difficult for protesters to arrive and to coordinate their locations and movements.  We know that there are a plethora of National Security Statutes on the books that give TPTB the power to take control of every manner of infrastructure during times of crisis. 

I have no doubt that the free flow of $$ will be prevented in the event that TPTB feel threatened.  Your phone and internet connection will suddenly not work if TPTB decide to make them not work.

2.  Bad cognitive maps

Predictions are based on having an accurate cognitive map of reality.  If the map is bad, predictions will be bad.

I want to remind everyone how poor  and how manipulated our cognitive maps are.  Look at these pictures and with a fresh and open mind, just ask what is going on here?

I hope that it is crystal clear the point that I am trying to make here.  IF the above pictures are reviewed with fresh, unbiased eyes, we see absolutely nothing that would lead us to think that this was the site of a jet airliner crash.

But we are hardwired to trust each other.  Especially to trust authorities.  This is a great gift of humans that enable societies to do things that individuals could not do alone.  We form consensual models of reality.  As a group, we feel we understand what is going on.  Another aspect our nature is that we feel distressed when we do not believe the group consensus.

It is absolutely breathtaking that we can see these pictures, be TOLD that this is a jet crash, and BELIEVE it without critical thought.  To not believe it induces STRESS.

Hence, when a group holds monopoly as an arbiter of "what is true," they hold unbelievable power over all of us.

Here is what we are supposed to believe happened:

So, even the cognitive models of very smart people may be worth crap.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
Thank you SP...

You are always there to lend a different perspective.  There is great informational quality to those pictures of the Shanksville site.. if you open your eyes.  But just like candles can melt steel, cannot the ground kinda liquify temporarily, in a weird non-Newtonian (fluid) viscoelastic kind of way?  That must explain the lack of plane parts strewn about, because the Government couldn't lie about something this big, and so many people could not keep a secret, right?  Hmmmm.. where else was there (early) discussion about a lack of plane parts.. hmmm... could it be the Pentagon hit on 9/11?        

My point about the Gold price is not that I can't buy at today's price (I can.. thankfully) but that the price does NOT contain the information most market participants assume that it does about the status of supply vs. demand.  The price is real in the sense that I can still transact small quantities of Gold at that price today.. it is not though real in the broader sense of it being a market price that balances supply of the physical, underlying asset, vs. demand.  The tail is wagging the dog.. we can see it, and we know why... this is our advantage.  

The only way that TPTB can maintain their pricing power for now is to allow for some controlled retreat.  My prediction for the scenario ahead of us is as follows;

1)  Continued retreat on Gold/Silver pricing as the stock market continues to tank.

2)  When the FED finally retreats from their tightening.. or starts new stimulus in the months ahead, the stock markets will be happy.  This is when Gold and Silver will be hit, and hit hard with futures selling.  This will be counterintuitive, but will be possible because of 1) above.        

 

LogansRun's picture
LogansRun
Status: Diamond Member (Online)
Joined: Mar 18 2009
Posts: 1443
Jim, got it.

I understand your position.  And from your perspective, you're right.  I as well understand what Dave is saying.  IMO, you're both correct, but just seeing the system/situation from different perspectives....as SP stated above.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
information content

JimH-

... price does NOT contain the information most market participants assume that it does about the status of supply vs. demand

Sure it does.  Western gold buyers don't currently care much about physical.  Price is conveying this information quite clearly.  For them, today, paper is a perfectly satisfactory alternative.  I know you really don't like this, and you seem to blame COMEX for the western buyer's current preference for receipts over physical, but that's once again just reality.

If you're trying to say that the current supply/demand situation might change dramatically if the western buyers ever decide they all suddenly want physical instead of paper - then yes I'm right there with you.  Bank runs are amazing things to behold.  But do the current market prices & premiums accurately reflect the current physical supply/demand fundamentals here in the west?  Sure they do.  Otherwise, price & premiums would move until the demand was suppressed and/or more supply came onto the market.

Same thing holds for FRNs and bank failures.  Right now, CURRCIR (currency in circulation) accurately reflects the public's demand for cash.  There is no cash "undersupply" at the moment.  If banks start failing, CURRCIR will fall dramatically short of demand.  Same thing with gold if there is a sudden shift in demand.

Warehouse receipts really do have a place in commerce.  So does physical.  FRNs have a place in commerce, and so do electronic bank deposits.  One is more convenient, but vulnerable to institutional or systemic failure.  The other is substantially less convenient, but immune to systemic or institutional failure.

 

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Assumptions SP.

 

 

has tested 10 of the assumptions that are taken as axiomatic by modern science SP.

All of them were found to be unsupported, declarative statements. Those who build their models upon them are appealing to authority. "de Carte said it, so it must be true."

Have you seen the tiny little blip that is offered up as evidence for the existence of the Higgs? The Higgs field hypothesis falls on Newton's sward. 

Newton's First Law states that an object will remain at rest or in uniform motion in a straight line unless acted upon by an external force. 

(Another declarative statement.)

How can a field impel a massive object to keep moving? 

The whole thing is a house of cards, all jokers. 

pinecarr's picture
pinecarr
Status: Diamond Member (Offline)
Joined: Apr 13 2008
Posts: 2237
Here you go, LR

LogansRun's picture
LogansRun
Status: Diamond Member (Online)
Joined: Mar 18 2009
Posts: 1443
Thank you PC!!!

If you get a chance, repost on the DD or somewhere where all can see.  It's very good!

 

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