PM Daily Market Commentary - 4/28/2016

davefairtex
By davefairtex on Fri, Apr 29, 2016 - 2:32am

Gold rose +20.80 to 1268.10 on heavy volume, while silver climbed +0.32 to 17.60 on heavy volume also.  Today's move was almost entirely about the Yen - up a massive 3.03% because the BOJ ended up doing nothing instead of printing more and dropping rates, as they were expected to do.

Gold broke out above its old downtrend line, managing to close relatively near the highs for the day.  The increasing volume is bullish, as is the currency backdrop - the dollar continues to plummet, which usually supports PM.  I said yesterday we needed either a new emergency or a collapse of the buck: we got the latter.  If the buck continues to fall, I believe it is likely that gold will break out to new highs.

If gold liked the rising yen, silver loved it, coming close but not able to break above last week's high of 17.72.  The buying of paper silver (at COMEX) has been simply relentless - you can see that there have been very few red candles since the current move started back on April 12th.

As of this writing, silver has actually broken through the prior high in Asia due to a continuing drop in the buck.

True to form, miners made new highs today, with GDX up +4.46% on heavy volume, while GDXJ climbed +4.51% on very heavy volume.  The breakout to new highs came after that two-day decline which found support on the 9 EMA.  So that's the current recipe - buy miners when they touch the 9, and enjoy a breakout a few days later.  That's not advice, it is just an observation of what has been happening.

Platinum rose +2.45%, palladium was up +2.02%, and copper fell -0.11%.  PM is looking quite strong, while base metal copper is lagging behind.

The buck fell hard today, dropping -0.64 to 93.73, breaking the 94 support and threatening to make a new low.  As mentioned, this was largely because of a big (+3.03%) move higher in the Yen, which popped because the BOJ did nothing.  No doubt BOJ wasn't happy about the rally, but what's a central bank to do?  It looks like markets expected BOJ to go more negative and when they didn't, the buck was sold hard.

WTIC rallied again, up +0.55 to 45.88; the oil longs seem to have the bit in their teeth right now, causing oil prices to move steadily higher, similar to what's happening in silver.  Oil equities did not follow suit, with XLE dropping -1.49%.  The divergence is curious - and if it continues, may signal a top in oil.

SPX fell -19.34 [-0.92%] to 2075.81, led lower by energy and technology.   SPX printed a very modest "lower high" which defines a downtrend, and also closed below its 9 EMA.  Today's sector winners & losers look a whole lot more like a "real decline" - best performers were consumer staples and utilities.   Most of the drop happened towards the end of the trading day.  Based on the number of bearish indicators alongside the unreasonably bullish "dumb money" confidence indicator, I believe this could be the start of a more serious decline.  VIX thinks so too: up +1.45 to 15.22.

TLT appreciated the SPX move lower, rising +0.41% and also managing to crawl back above its 9 EMA.  It does look like the low may be in for bonds.

JNK fell -0.03% today, torn between the equity market "risk off" and the move higher in oil.  JNK printed a shooting star candle, a 48% chance of marking the stop.  A confirmation tomorrow would support the bear case for equities.

CRB rallied +0.37%, printing a new high and closing above its 200 MA for the first time in two years.   Is this just about gamblers in China?  Copper isn't rallying too, which makes me nervous.  Perhaps its just the byproduct of rising oil prices.

It appears that the buck is starting to decline in earnest, and PM is responding by breaking higher.  The Fed is six weeks away from even having to consider raising rates; if the buck can't find support at 92.52 (the next prior low), the buck could have a long way to fall.  If SPX drops too, money could continue to flow even more strongly into PM.  Risks of course is the bearish-looking COT situation, which so far hasn't resulted in any measurable decline.

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14 Comments

Jim H's picture
Jim H
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The inscrutable rally...

The rally in PM's and mining shares continues - Silver could have an 18 handle today.  After years of beatings..  we have all learned to flinch at each small drop, thinking it's the next full scale waterfall down.  But so far the tenor has changed and there seems to be a reluctance on the part of the bankers to throw enough paper at this market to blunt the demand.. hence price goes up.

Never forget that, in the context of stocks and bonds and currencies, Silver... real physical Silver, is a tiny, tiny market.  The market capitalization of Apple (the cumulative value of all it's stock shares) is $525B, even in it's recently diminished state.  The total value of all Silver mined in a year is around $15B.  Tiny, Tiny, Tiny Silver.  We can't know for sure if this is it.. the inevitable break between the paper price control mechanisms that have been in place and a new era where physical supply vs demand leads price discovery... but if it goes on too much longer it will be.  Buying begets buying, begets shortages, begets media attention... and so it goes.  Individual Silver coins now have a 20-handle... 

Good luck to all - looks like another strong day for the miners.. EXK up 3.79% in the pre-market.       

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Jim H
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More on the inscrutable rally, from ZH

http://www.zerohedge.com/news/2016-04-29/rally-gold-stocks-reaches-first...

The XAU traded above this resistance today, reaching nearly $88 before closing at $86.90. Is that enough to signal a breakout of this resistance? Not in our view. It will take a much more decisive move above $86 to convince us that it has overcome the resistance. This is due in part to the variability of these lines of resistance, considering their long-term nature, especially the post-2000 Up trendline.

Furthermore, it would be much healthier and constructive to see the XAU consolidate near these levels a bit longer to “digest” the 100%+ gain of the past 3 months. By running straight through these levels after almost no pause (~6 days) when it is so extended, the XAU runs the risk of exhaustion and a failed breakout. That action could lead to a more prolonged and damaging pullback than if it simply consolidated for a bit longer before breaking out.

Regardless of how things transpire, in our view, above roughly $86 in the XAU appears to be bullish, opening up potential upside to above $110 as the next level of resistance. Below $86 and the index could struggle. Again, this wouldn’t necessarily be a terrible thing if the XAU consolidated its recent gains before launching the next leg higher. Roughly the $70 level may be the best level of support below should the XAU pause here.

The last time we mentioned that gold stocks may be at an important juncture, they went on to rally over 100%. While this juncture may not be as critical, it could be the biggest test yet in the impressive gold stock rally.

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Jim H
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PHYS vs GLD article from Seekingalpha

http://seekingalpha.com/article/3968896-gold-101-best-gold-etf#alt1

Generally a good article.. explains in pretty simple terms why a person might want PHYS over GLD.  There is only one emphasis point missing.  The writer makes the correct point about the nature of GLD;

GLD was set up not as a way to invest in physical gold, but as an ETF that tracks the price of gold.

When we talk about tracking.. we mean tracking the price set for Gold in the paper markets.  The author of the piece does not go into any detail as to the implications of this, nor to the fact the reason PHYS has, and can outperform GLD is precisely because it is not a tracking fund.. it is simply shares in a pile of physical Gold.  It ends up being close to a tracking price in a "normal" market because the physical convertibility option pretty much guarantees that the share price can't underperform the Gold price by too much, otherwise the difference will be arb'ed away.

BUT.. in the case of a market where supply of Gold gets constrained... there is no real limit as the premium that can accrue on PHYS shares compared to any remaining paper price.  PHYS becomes it's own market.. you want Gold in a brokerage account?  PHYS will be it someday.  While the truth is the Sprott Gold trust PHYS has never sported a really large premium... it's Silver counterpart, PSLV has.  The PSLV premium hit almost 30% as I recall at one point.. Dave and I both recognized it as unusual at the time.  So that can and probably will (IOM) happen to PHYS at some point as the market participants who want Gold exposure in their brokerage account battle to get a few shares of PHYS.     

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Jim H
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PHYS vs GLD article from Seekingalpha

http://seekingalpha.com/article/3968896-gold-101-best-gold-etf#alt1

Generally a good article.. explains in pretty simple terms why a person might want PHYS over GLD.  There is only one emphasis point missing.  The writer makes the correct point about the nature of GLD;

GLD was set up not as a way to invest in physical gold, but as an ETF that tracks the price of gold.

When we talk about tracking.. we mean tracking the price set for Gold in the paper markets.  The author of the piece does not go into any detail as to the implications of this, nor to the fact the reason PHYS has, and can outperform GLD is precisely because it is not a tracking fund.. it is simply shares in a pile of physical Gold.  It ends up being close to a tracking price in a "normal" market because the physical convertibility option pretty much guarantees that the share price can't underperform the Gold price by too much, otherwise the difference will be arb'ed away.

BUT.. in the case of a market where supply of Gold gets constrained... there is no real limit as the premium that can accrue on PHYS shares compared to any remaining paper price.  PHYS becomes it's own market.. you want Gold in a brokerage account?  PHYS will be it someday.  While the truth is the Sprott Gold trust PHYS has never sported a really large premium... it's Silver counterpart, PSLV has.  The PSLV premium hit almost 30% as I recall at one point.. Dave and I both recognized it as unusual at the time.  So that can and probably will (IOM) happen to PHYS at some point as the market participants who want Gold exposure in their brokerage account battle to get a few shares of PHYS.     

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davefairtex
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Its the dollar, stupid

Heh.  The PM rally isn't that hard to figure out.  The buck has been hit hard today - is down right now another -0.66 after falling about the same amount yesterday.  It is hovering right around round number 93.  (93!)  Those are big moves.  On my trading app the buck has dropped clean through support.  Yen is the primary beneficiary, up +1.25% today after jumping up +3% yesterday.

Gold and especially the miners absolutely love the falling dollar.  Gold broke above its previous high of 1287 and ran into selling at round number 1300.  Silver is flirting with 18.

I believe this PM breakout would not have happened if the dollar hadn't fallen so hard.  Thank the BOJ for doing nothing.

SPX looks to be in a spot of trouble.  It is dropping lower, following through after yesterday's support break.  I'm watching oil printing a shooting star candle right now - I think oil is doing its share to take SPX lower, but right now its healthcare that is performing worst.

If oil has topped out here and starts to materially decline, we could see quite the move lower in SPX.  I base this at least partially on the overly bullish sentiment from dumb money, which had recently moved to an extreme.

AAPL is continuing to plunge after its bad earnings surprise two days ago.

I guess earnings still matter.

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davefairtex
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a reluctance to throw paper??

JimH-

there seems to be a reluctance on the part of the bankers to throw enough paper at this market to blunt the demand.. hence price goes up...

You're funny.  Silver has a record number of commercial shorts in place right this moment.  As in, never higher, in the history of the series.

This clearly shows the "reluctance" of the bankers to throw enough paper at the market.

This recent rally would be enough to show any non-faith-based observer that "the bankers" have absolutely no control over the market once the buyers at COMEX decide they want to go long.

Unless...maybe...are you are suggesting that the bankers WANTED price to rise?  And somehow they showed this upside enthusiasm by adding a record number of short contracts into the mix?

I know.  Logic doesn't matter, facts don't matter, the goldbug storyline must be preserved at all costs.  It has been an article of faith for far too long to abandon now in the face of evidence to the contrary.

FWIW, I think the rally stops when the buck finally bottoms out.

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davefairtex
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PHYS/PSLV premiums

Totally agree on where the premiums on both of these go when a shortage finally materializes.  They will be the place to be at that time.

Until that shortage appears, buying PSLV/PHYS at a significant premium can be dangerous; if Sprott can get his hands on physical "in size" (and he has been able to do this consistently - in spite of claims to the contrary), the premiums will be wiped out by his repeated secondary offerings.

 

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dryam2000
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Yes, all about the USD

The strengthening USD starting in mid-2014 was a big contributor to the fall in oil prices, and caused major distortions throughout the world such as a big decrease in credit markets outside of the U.S.

The fundamental supply/demand story for oil will likely worsen putting more pressure on the oil exporting countries, the energy companies, and the highly leveraged and already stressed financial system.  The only financial engineering I can see that will improve oil prices is a lowering of the USD.  As the USD depreciates, the PM's will be a huge beneficiary.  

I suspect there will be some big gyrations, but trend will continue for quite a while.

 

I would add that the most insidious tax is inflation, and governments love to tax people via inflation because most people don't recognize it for what it is (boiling the frog slowly).  So, there is a vested interest in managing down prices in things such as the PM's because the can be a flashing neon sign which signifies the inflation.

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Jim H
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Say what you want Dave...

There are powerful fundamental forces working behind the comex scene here that you never talk about because you don't acknowledge the long term effects of manipulation (meaning today's gross miss-pricing of Gold and Silver).... but these are the forces that will, eventually, cause the market to correct such that price becomes more reflective of true supply vs. demand for PM's.  Yes, things seem to correlate to dollar moves for now.. but that may not be the prime force here.  What is really happening IMO is that the physical market demand is having more effect on price.. the mechanisms to transmit this, which have been almost completely devoid in the Comex dominated past are;

1)  Opening of ABX in Feb;  https://abx.com/about/about-us/

2)  Initiation of Yuan denominated fix two weeks ago;  http://www.cnbc.com/2016/04/19/china-launches-yuan-gold-fix-in-bid-to-be...

We have been subject to fraudulent markets for years.  The ability of the bankers to move the markets, or at least to make moves that last with their unbacked paper, is ending.  If they try too hard to drive the price back down now with paper, the mechanisms exist to more rapidly siphon physical metal around the world.   

Dave, your commentary always seems to suggest that the background is unchanging.. but that is not the case.  The ability of the bankers to play with the market has waxed and waned over the years, depending on the advent of first the Comex, then derivatives, then HFT, etc, etc., and of course the level of desperation felt by TPTB.  I know that OI is high and that indeed the situation today reflects a lot of paper buying, but you have to think about how the Comex (pricing) era ends... maybe it ends with the banks pulling off one more rinse repeat that is still to come.. maybe it ends with OI high and the banks stuck in their shorts.        

I base my analysis on the ideas above.  I am not a trader.. my sole thesis has been to patiently wait out the multi-year banker driven PM bear market, waiting for it to break.  I can't be sure that this is, "it".. but it sure feels like we are close.   

http://www.jsmineset.com/2016/04/28/my-response-to-bob-moriarty-public-a...

Put simply, COMEX is a fraud. A call on this contractual metal cannot be met because the metal simply does not exist. I believe when the “call” for delivery comes, COMEX will be forced to declare force majeure and settle with cash. As I asked in the article, is this a default or is it not? In the real world it will make no difference at all whether it is “legally” a default or not, “practically” IT IS! In the real world the prices of gold and silver will have exploded and the “cash” so generously provided by COMEX to “settle” will not purchase the ounces you thought it would. In essence, while gold and silver supplies go into hiding, you will be left holding a pile of devaluing and worthless dollars that will not “buy” what you were promised.

If you want to be “technical”, here are several passages from COMEX rules:

Section 702 of the rules states in part:

“In the event a clearing member fails to perform its delivery obligations to the Clearing House, such failure may be deemed a default pursuant to Rule 802.”

Section 714 of the rules states in part:

“A failure by a clearing member carrying a short futures position to tender a Delivery Notice on or before the time specified by the Clearing House on the last day on which such notice is permitted shall be deemed a violation of this Rule, except that the President of the Clearing House may, for good cause, extend the time to present such notice. Unexcused failure to make delivery shall be deemed an act detrimental to the interest or welfare of the Exchange. In addition to any penalties imposed as provided in Chapter 4, the Clearing House Risk Committee shall determine and assess the damages incurred by the buyer.”

Section 802 of the rules states in part:

“1. Default by Clearing Member

If a clearing member of CME, CBOT, NYMEX , COMEX, or an OTC Clearing Member, (i) fails promptly to discharge any obligation to the Clearing House or (ii) becomes subject to any bankruptcy, reorganization, arrangement, insolvency, moratorium, or liquidation proceedings, or other similar proceedings under U.S. federal or state bankruptcy laws or other applicable law, the Clearing House may declare such clearing member to be in default. For purposes of this Rule 802, each default by a clearing member will be considered a separate default event, provided that if a clearing member has been declared in default, subsequent failures to pay by such defaulting clearing member shall not be considered separate default events unless and until the original default has been fully resolved and such clearing member has been restored to good standing.”

The obvious question is this, if COMEX uses the word “default” in their own legal language then how is it impossible to ever occur? Would they really address an impossibility? While these rules pertain to individual members, what happens collectively were the longs to demand delivery of non-existent metal? What will it be called when collectively the members cannot perform and deliver? “Default(s)” as in “plural” or just one grand default?

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Ready to pounce on silver, but not here!

Gee, Jim, I wish you'd stop with all the happy talk of silver going up, up, up!  I'm still sitting here ready to pounce when I can get a silver Eagle for $16.00 ($13.25 spot + $2.75 premium).  I'm rooting for one last waterfall down.

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davefairtex
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bull cookies

JimH-

As I have said time and again, if the goldbugs are right and the COMEX really is the lever to exercise complete control over the gold market, they simply CANNOT let it fail.  What's more, avoiding failure is utterly trivial.  All they have to do is move gold from eligible to registered.  There is now 700k oz of registered, up from 73k oz earlier this year, and there is 6.4M oz tons of eligible.  Thats 220 tons.  And another 800 tons in GLD.

It amazes me that otherwise sane and intelligent people can believe in these particular fairy tales.

I like gold, its one of my few buy-and-hold investments, but your goldbug writers give gold a really bad name.  Their quasi-religious fervor turns normal people off, and reinforces the notion that only people who can't follow simple logic would ever own the stuff.

Price is moving higher because longs are buying huge numbers of COMEX GC and SI contracts.  Its a pretty simple story.  I'm happy, you should be happy too.

When shortages appear, I'll happily point them out.  Gleefully, even.  I'm hoping and praying for them to appear.  (Ok, maybe not praying, but you get the idea).   The current rally is all about a falling dollar and managed money going heavily long.  I see no signs of shortages, a COMEX default is impossible at the moment, the COT shows heavy buying by managed money.

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Jim H
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Bull cookies back at ya : )

Dave, you said,

When shortages appear, I'll happily point them out.

The shortages are already baked into the cake.  There are huge amounts of paper Gold in the world that are essentially fraudulent, double counted, and more.  Germany's Gold held in the US comes to mind. 

We are just going to have a agree to disagree here..  you are a very good analyst Dave.. your fatal flaw is that you do not recognize the manipulation for what it is, and what is has wrought systemically.  I will point interested readers to an analyst who does;

http://www.safehaven.com/article/41072/moving-to-the-post-lbma-era-gold-...

....Trading of unallocated gold contracts on the LBMA began in the late 1980s and, according to the LBMA, is now the vast majority of all daily gold trading volume in London. The introduction of unallocated contracts was not a pedestrian matter with Evelyn Rothschild himself allegedly directly lobbying Margaret Thatcher for this change in the gold market. The Rothschilds ran the daily Gold Fix at their bank setting the price at the LBMA from 1919 until 2004 and have been synonymous with gold over the last 150 years.

The LBMA states that these unallocated gold contracts have the holder as merely an unsecured creditor for gold and not an owner of gold. That is an important difference. While ownership of real gold can be created only by first securing and transferring the ownership of metal, which is limited, unsecured claims for gold can be created without limit - and we see this in the London gold market unallocated spot contracts that are traded.

The daily gross turnover of gold trading on the LBMA spot market is 200 million oz. - twice the world's annual gold mine production and, according to the LBMA, it is 10x higher than the net settled trade volume totals posted by the LBMA . However, as touched on above, there is an important distinction to make. The vast majority of this daily trading is not gold trading. Instead, the trading is primarily of these unallocated gold contracts representing trading of gold promises and not of gold itself. In effect, the trading of unallocated gold contracts at the LBMA has corrupted gold in this market from exchange of a limited real gold asset to exchange of an unlimited virtual or digital asset.

Where are the 10,000+ Tonnes of Gold?

Using the typical commodity trading multiplier of 2x to 3x of daily trading volume to calculate the open interest, or total claims, in the market, the daily trading volume in London implies a total open interest of gold claims on the LBMA of 400M to 600M oz of gold in the spot market - claims equivalent to 13,000 to 19,000 tonnes of gold. The LBMA is located in the small 'square mile' City of London (a form of quasi-independent city-state operating under its own rules and governance within greater London) and the LBMA does not publish an open interest figure as most raw material or commodity exchanges do.

The pension funds, corporate interests, sovereign wealth funds, private interests, etc. that hold unallocated spot gold contracts on the LBMA instead of physical gold are holding a gold substitute with these unallocated spot contracts. This supply of unallocated gold contracts creates 'gold' where there is none and the massive volume of gold trading each day can move the price of gold to almost any level as the only limit is the requirement to supply the few who historically have taken delivery of spot physical gold. Leasing-out of sovereign physical gold by central banks and the officers of the gold mining companies of the world who sell their production ultimately through the LBMA via bullion banks also provides fuel to supply this gold pricing mechanism. This has enabled the suppression of the market price of gold against the best interests of mining corporations, society as a whole, and destroying shareholder value in the process.......

 

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davefairtex wrote: JimH- As I
davefairtex wrote:

JimH-

As I have said time and again, if the goldbugs are right and the COMEX really is the lever to exercise complete control over the gold market, they simply CANNOT let it fail.  What's more, avoiding failure is utterly trivial.  All they have to do is move gold from eligible to registered.  There is now 700k oz of registered, up from 73k oz earlier this year, and there is 6.4M oz tons of eligible.  Thats 220 tons.  And another 800 tons in GLD.

It amazes me that otherwise sane and intelligent people can believe in these particular fairy tales.

I like gold, its one of my few buy-and-hold investments, but your goldbug writers give gold a really bad name.  Their quasi-religious fervor turns normal people off, and reinforces the notion that only people who can't follow simple logic would ever own the stuff.

Price is moving higher because longs are buying huge numbers of COMEX GC and SI contracts.  Its a pretty simple story.  I'm happy, you should be happy too.

When shortages appear, I'll happily point them out.  Gleefully, even.  I'm hoping and praying for them to appear.  (Ok, maybe not praying, but you get the idea).   The current rally is all about a falling dollar and managed money going heavily long.  I see no signs of shortages, a COMEX default is impossible at the moment, the COT shows heavy buying by managed money.

We are in a Wizard of Oz landscape.  We know who is pulling the levers right now but not for much longer.  Yellow Brick Road and Silver Slippers...

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davefairtex
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unallocated gold open interest

Jim, that's great!  You do bring up something interesting.  What IS the open interest of the unallocated gold at LBMA?

Your writer uses the trading volume as a proxy for the OI:

Using the typical commodity trading multiplier of 2x to 3x of daily trading volume to calculate the open interest, or total claims, in the market, the daily trading volume in London implies a total open interest of gold claims on the LBMA of 400M to 600M oz of gold in the spot...

Certainly paper (unallocated) gold holders will want to roll into physical (allocated) if/when a failure of the financial system is threatened, which is the "baked in shortage" you talk about, just as the holders of bank deposits will want cash when a banking system failure is threatened.  I definitely buy that argument, but its a shortage that only shows up when confidence in the system completely snaps.

Regarding the creation of paper gold to satisfy desire for exposure to the price - I buy that too, but the 12k ton number seems high, considering COMEX is only 1.6k tons and it is alleged to be the primary lever for controlling the price of gold.  The analyst decided to use the much larger of the two trading numbers for his "kentucky windage" estimate for LBMA's OI.  If he decided to use the lower trading number, OI would be much less, more on a par with COMEX.

I don't know enough about LBMA and the trading there to judge myself.  It sounds like it might be something important, but I'm so used to goldbugs breathlessly exaggerating the situation ("OMG COMEX trades more than the mine supply of gold every single day!  gasp!") that I find it very difficult to just trust what he says is reflective of reality.

With me, your writers have low credibility because of their past bad behavior.  Maybe if Koos Jansen said it, I'd be more inclined to believe it, since he's pretty rigorous - I've never seen him step outside the bounds of what the data actually says.

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