Friday's the Last Day to Scare You Out of Gold (Friday Update)

Not surprisingly, banks (possibly aided by Western central banks) are doing everything they can to push the paper price of gold down before the last trading day Friday for gold futures and options.

As you'll see below, the most recent attack began During the thin trading of Hong Kong trading hours of June 25th. If you were a seller of a massive amount of gold you wanted to sell for the best price, this would be the worst hours to sell.

But if instead, you didn't care about best execution of the trade and instead wanted to push the price down, this would be the ideal time to sell massively into a thinly traded market to have the greatest effect on price. Then, the algorithmic computer trades would take over and accelerate the selling.

The fundamental case for gold is growing, not diminishing

From Casey Research:

First, the bad news…

The selling is likely not over. The capitulation process may not be completed. Overall momentum remains down.

How low can gold and silver go? One can view all sorts of chart patterns and technical signals, and while a few will eventually be correct at calling the bottom, we prefer not to base our decisions on this type of strategy, starting with the fact that there are many different interpretations and too much variance in the predictions. What we do know is that given that capitulation is under way, the selling will overshoot to the downside, just like surges can overshoot to the upside. Our response should be to prepare to take advantage of that situation.

Sentiment has shifted to negative. All the headlines and stories about gold are negative and bearish. It will take a while for these investors to reenter the market, especially those who just sold for a loss. This won't be a years-long process in the making, but it likely won't happen in a month, either. The implication here is that patience will be required on the part of committed precious-metals investors.

Now the good news…

The Game of Gold Musical Chairs: The Music May be Stopping

In the past I have described the world of physical gold as a game of musical chairs. The reason is that there is an estimated ratio of paper gold to physical gold of somewhere near 100 to 1. So if for some reason, say a monetary crisis, everyone who had a paper claim to gold wanted to take possession there would be, in essence, a game of musical chairs to claim gold but with 100 people and only one chair. And that would mean most who believe they "own" gold would find that they have nothing more than a claim about as valuable as a futures account at MF Global.

Of course, in the classical prisoner's dilemma he who defects first defects best. That may be exactly what is going on in the physical gold market as Zerohedge reports, JPM Vault drops by 28.4% overnight: 

With a massive 6,208 (or 80% of the total in the entire Comex system) Customer Delivery issues outstanding against JPM so far in June alone, many have been wondering - how and when will the firm reconcile what is seemingly more demand for JPM vaulted gold than the firm has in its possession?

While we still don't have the answer, what we do know is that as of an hour ago when the Comex released its daily vault depository statistics, JPM has said goodbye to another 28.4% of all of its vaulted gold - the largest one day withdrawal since April 25, the result of the departure of 61.5% of its Eligible gold, as hundreds of thousands of registered ounces in the bast few weeks have seen warrant detachment.
Which means that as of last night, total gold held by JPM has fallen to a new fresh all time low of just 550k ounces, down from 768K the day before, and total eligible gold of only 136,380 troy oz in inventory (just over 4 metric tonnes) - also a record low.

Whoever is "running the JPM vault" shows no sign of relenting. At this pace, the world's biggest gold vault located below 1 CMP, and just next to the Fed's own gold vault, will be empty in about 1.5-2 months.

This is happening in a week that the Shanghai gold market is closed for a holiday for several days so don't be surprised if the old GLD is smashed to scare out more weak hands. Remember, GLD is an open end exchange traded fund. This means shares are created and destroyed as demand ebbs and flows. If there's a sell off, the fund can release/sell its physical gold bullion to willing buyers. And that might be very, very convenient for JP Morgan.

That said, now is a good time to buy more physical gold whether you missed the boat several years back or need to lower your dollar cost average (Or other currencies for my international readers) if you started buying over the last two years. Yes I know, if that includes you, its been a very frustrating few years. Here in the US though,most every asset class is terribly over valued. Gold remains "cheap" considering we are printing $1Trillion new dollars a year, have racked up $16.8 Trillion in debt we can never pay back and currently have negative real interest rates (inflation higher than Fed funds).

And you may not have noticed, but the ten year Treasury is creeping higher. TF Metals has done a great job describing why that matters.

Hold tight, be patient. The Dow:Gold ratio will approach 2:1 or 1:1 at some point. With the Dow currently at 15,122 and gold at $1,376 there will be upside to gold, a time to sell, and hopefully after a true economic reset, a time to buy stocks again.

What If We Had Created One Million Jobs Last Month?

When the US jobs report came out Friday, the big talk was not the mediocre US jobs report of 175,000 jobs but the Canadian jobs report of 95,000. Why?

Rick Santelli tells us why. The CNBC video can be seen here.

But everybody is going bonkers on the trading floor. They haven't stopped talking about the report. Not the US report, the Canadian jobs report. That's really the talk of the town. I'll tell you why.

Canada has 34 million people. So anything we deal with regarding Canada, and we've been down this road before, you have to multiply by ten to make it an apples and apples equivalent for the US. So what happened today? Well, they were going to look for 15,000 jobs.

What did they end up with? They ended up with 95,000 jobs and unemployment rate of 7.1%. So to make it apples to apples, 95,000 becomes 950,000. I believe in the Reagan administration we had a million job creation in one month.

 Why does this matter? Well Canada has a population about equal to the state of California and roughly one tenth that of the US. His point was you can make an apples to apple comparison between the US and Canada simply by adding a zero to Canada's job number to compare it to the US' job number. And that Equivalent would be close to one million jobs created in the US.

Is that even possible? Well, I've point in a previous post, What A Real  Recovery Looks Like Part II, that in September,1983the economy added 1,114,000 jobs in a single month! Back then the population of the US was 233 million. That compares with a current population estimated by the US Census Bureau of 315 million today. So the 1983 number was even larger as a percent of the workforce then than if it occurred today. In fact, since the population is roughly 50% higher we might extrapolate that the workforce is also 50%, especially given that Americans are working longer even as the average age of the population grows older. So a true apple to apples comparison to today might be around 1,671,000 jobs to be equivalent to 1983's feat. Now that's something to think about.

As I had mention in that previous post, these two administration took two remarkably different paths to bring back economic growth. One clearly has worked while another clearly is not bringing about the results we would like to see. Once again, this is an economic blog, not a political blog. I am simply making a comparison of the two recoveries. As Americans, we should want to see economic growth increase and we should be able to look honestly about what has worked and what has not. Canada is certainly doing something right that we are not doing today.

JP Morgan's Gold Vault is Just About Empty (Updated)

Looks like JP Morgan's customers want their gold back.

As I mentioned in Something's About to Break, bullion banks like JP Morgan do not have enough physical gold to meet their paper obligations. Going short GLD has two purposes. The first is to repress the price of gold to make it a less desirable place for investors. The second, when they flood the market with sells, is to push the price of GLD down to encourage investors to sell. This makes physical gold available when the ETF trust company doesn't need to hold as much in their vaults to back the remaining shares. GLD is, after all, an open end trust. They can create or destroy shares as demand is needed much like a traditional mutual fund.

Below you will clearly see that JPM's gold vault holdings are declining on the COMEX where contracts trade in the US. But if you look at the difference between registered and eligible, you'll see  that its eligible is declining fast. But before we get too far, let me explain the difference.

The following is from Silverdoctors. Just replace the word silver with gold:

  The Eligible category means that the silver meets the exchange requirements.  Exchange requirements include purity, size (eligible silver bars must weigh within 10% plus or minus of 1000 ounces), and also must be from (stamped with) an exchange approved refiner.
Eligible silver essentially means that the silver is stored in COMEX warehouses, and conforms to exchange standards.  It is being stored in the COMEX warehouse for a private party, but it is NOT available for delivery to contracts.
For example, Warren Buffet decides to store 30 million ounces of silver owned by Berkshire Hathaway (he has no intention of making the silver available for sale at current prices) in a COMEX vault rather than his Omaha basement, he could do so, and the silver would be eligible inventory.

Registered silver means that the silver is fully available for delivery to longs who stand for bullion delivery.
Registered silver used to have a paper bearer warrant attached for delivery, but these paper warrants are reportedly being phased out.
To simplify, registered silver is deliverable- or available for delivery to a long standing or demanding bullion delivery.

Eligible silver can become registered, and vice-versa. (i.e. the owner can decide to make his silver available for sale at a certain price)
This is seen almost daily in the adjustments section of the COMEX inventory data reports.
In order for eligible silver to become registered, the owner must have an exchange licensed depository (Brink's, The Delaware Depository, HSBC, JPM, or Scotia Mocotta) issue a depository receipt (warrant).
In addition, the bars must total 5,000 ounces (size of 1 contract) plus or minus 6%.

As far as the silver manipulation and the dwindling COMEX silver supplies, registered and Total COMEX inventories have been substantially decreasing over the past few years.   Just in the last few years registered silver has declined from 70 million + ounces to 33 million ounces (touching a low of 25 million oz in July), and Total inventories have declined from 140 million oz + to ~ 100 million oz.  Eligible inventories meanwhile have been increasing.

The most emphasis on COMEX silver inventories is placed on registered, as technically, this is the only silver that is available for delivery to longs.  Theoretically, if 34 million oz worth of longs stood for delivery in September, the COMEX would default, as only 33 million ounces of registered silver remain.
In actuality however, I believe that the TOTAL silver inventories are what matters.  Eligible silver supplies meet exchange requirements- they are simply not currently offered for sale by the owners.  Clearly this silver would become available at a certain price.   I also believe it likely that the owners would likely be strong-armed or forced into converting their eligible supplies into registered should things become desperate for the cartel.

Now, getting back to JPM's problems. It is suspected by many that bullion banks have been "borrowing" their client's eligible gold and silver to meet contracts they've written on gold they may not have. You may recall previous posts I've written about banks writing contracts on metals in a ratio of 100 to 1 of what they really have. Meaning that if 100 people decide they want their paper claims on gold they may be surprised to find only one person can actually have it. The other 99 are just paper promises. This is precisely what happened at ABM Amro when they told the certificate owners of gold that they could no longer have their own gold delivered to them! In essence they defaulted.

This may have been the reason for the April gold smash earlier this year. A bullion bank may not have had the physical available for client delivery and orchestrated (illegally manipulated) a crash which would scare investors out of GLD and resulting in some physical gold being made available when the trustee can suddenly release its surplus as the ETF's shares are reduced.

But, unfortunately for the bullion banks, that smash in the paper gold price created a global rush for physical gold at the new lower price.

I realize this post may seem a little rambling. But with all the above in mind pleas read today's post from Zerohedge:

 
Beginning on May 13, when JPM's commercial gold holdings tumbled to an all time low of 137,377 ounces, the firm's daily Comex updates became erratic with daily reallocations out of its Registered holdings into Eligible. Over the next three weeks, some 209K ounces had their warrants detached, and shifted into customer account, all the while the total number of ounces held in the JPM gold warehouse at 1 Chase Manhattan Plaza, remained flat at 817,167. Then two days ago the first withdrawal in nearly one month took place, with 13K ounces pulled out of JPM's Eligible holdings. Moments ago, the daily Comex update showed that yet another 15.4K ounces were withdrawn out of JPM, following the latest gold withdrawal, offset by a 49K ounces reallocation. This however is still short of the roughly 70K ounces due for delivery. Long story short, as of close of activity on June 3, the total gold held by the JPMorgan depository is now the lowest it has ever been at just 788,786 ounces and once again falling fast.

Then again, as many have noticed, the addition of an peculiar footnote to the daily Comex report which states the following:

The information in this report is taken from sources believed to be reliable; however,
the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness.
This report is produced for information purposes only.

means that it is quite possible that all of the above numbers are just that, and that in reality JPM (and others) are representing whatever they wish. It is, however, odd that the CME decided to add this disclaimer only now.

So what does it all mean? Well the bullion banks could very well orchestrate another paper gold smash, but they already know from last time that this will result in higher global demand for physical. Instead, they may very well get on board on the long side and allow the gold price to rise. There are already signs that they have reversed their record short positions (betting on falling prices) and are preparing to go long (betting on higher prices). TF Metals explains this very well. It appears for the moment the next big move in gold is likely higher.

Update 6/6/13 11:56PM

Zerohedge reports things are getting worse for JP Morgan:

 Those tens of thousands of outstanding delivery requests against JPM are finally starting to make their way through the pipeline: following the withdrawal of 28,380 ounces of gold after nearly one month of radiosilence out of the vault located below 1 CMP, today the CME reported that another 21k troy ounces of eligible gold were withdrawn from the bank (coupled with the reallocation of another 8.8K registered into eligible), taking the total to a fresh record low of 767,752 ounces.

In the meantime the delivery notices keep climbing, and in the month of June, JPM accounts for over 80% of all delivery activity:

Of course, with disclaimers such as this from the Comex...

The information in this report is taken from sources believed to be reliable; however,
the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness.
This report is produced for information purposes only.

... all bets are off

Eric Sprott on Paper/Physical Gold Bifurcation

If you are a regular reader here you know that this is a theme I've been writing about for the last year. First it was a prediction. Now its reality. But Eric Sprott adds analysis that only he can provide:


From Sprott Asset Management:

Recent outflows from physical gold exchange traded products (we use the SPDR Gold Shares, GLD) have been interpreted by the financial press as a sign of weakness in the demand for gold as an investment vehicle.¹

However, a closer look at the evidence suggests otherwise: the largest outflows in the history of the GLD (see Figure 1) started well before the large drop in the price of gold we observed on April 15th, 2013 (-9%, which represents a 1 in 11 years event)². In fact, the net redemption of shares of GLD started as early as the second week of January 2013 (on a 3-month cumulative rolling basis). In this note, we will explore the theory that it was the shortage of physical gold and the ensuing arbitrage opportunity that drove market participants to redeem shares of GLD.

So why are the bullion banks³ that act as Authorized Participants for GLD, a group that includes JP Morgan and HSBC and others (who by-the-way were mostly bearish on gold leading to the April Crash), redeeming so many shares of GLD?
One explanation could be that they are trying to match supply and demand so that the net asset value (NAV) of the ETF is in line with its price. Historically, we have observed that large movements in and out of the GLD are associated with large discounts/premiums to NAV (Figure 2). This is due to the constant creation/redemption of the shares to minimize the discrepancies between the ETF share price and the NAV. However, the recent wave of redemptions has occurred even while the premium to NAV has been very stable, hovering around 0% for most of the year.

FIGURE 1: FLOWS IN THE GLD (TONNES) - 3 MONTH ROLLING BASIS

Source: SPDRgoldshares.com and Sprott Calculations.
Last Observation: May 28, 2013 (Week 22).

FIGURE 2: GLD PREMIUM TO NAV AND GOLD FLOWS

Source: SPDR Gold Trust, Sprott Calculations. 

Note: Large flows are defined as weeks where the average % change in tonnes lies in the top or bottom 10% of its distribution (i.e. tail events). 

We believe that the answer lies in the discrepancy between the paper and physical markets for gold. Over the past few months, there have been rumours of bullion bank customers unable to redeem their gold.^4,5 While, at the same time, physical demand in Asia has been extremely strong this year.^6,7 According to the World Gold Council (WGC), Indian imports should reach 230-400 tonnes in Q2 2013 (an increase of more than 200% year-over-year) and imports from China keep breaking records (the WGC now forecasts total Chinese imports of 880 tonnes for 2013).⁸ This is reflected in the large premium customers in these markets pay over the “London Fix”, the price one should be able to get for physical gold. One way to measure the extent of the demand imbalance for physical gold in Asia is to look at what has been termed the “Shanghai Premium”, which is the difference between the quoted physical gold price on the Shanghai Gold Exchange and the London Fix gold price. Figure 3 above shows a weekly time series of the Shanghai premium in USD/oz. of gold. Since the beginning of the year, the Shanghai premium has been consistently above zero and historically large, reaching more than $50 per oz.

FIGURE 3: SHANGHAI PREMIUM (GOLD, $/OZ)

Source: Bloomberg. Last Observation: May 28, 2013 (Week 22).
Definition: Shanghai Gold Exchange Au9999 Gold (USD) minus London Gold Market Fixing Ltd - LBMA AM Fixing Price/USD.
“The Shanghai Premium is calculated on a weekly basis. Formula: (SHGF9999 Index * CNYUSD Curncy * 31.1g/oz) - GOLDLNAM Index”. 

Putting the pieces together

It is clear that demand for physical gold in Asia is strong and that the price of gold in these markets is well above the “Western” price. This creates arbitrage opportunities for market participants that have access to large and cheap quantities of physical gold in the West. The bullion banks happen to be the only ones able to redeem GLD shares for gold, and the GLD, with its 1,000 tonnes of inventory, acts like a large physical gold bank.

FIGURE 4: SHANGHAI PREMIUM ($/OZ) AND GLD FLOWS

Source: Bloomberg, SPDR Gold Trust, Sprott Calculations. 

Note: Shanghai Premium shown as a 3-month Moving Average GLD flows are rolling cummulative flows over 3 months 

According to the GLD prospectus, the bullion banks can create or redeem units for as little as 10bps (0.10%). Even with transport and insurance costs (which are arguably lower for large transactions and large international banks), there is a clear arbitrage opportunity for the bullion banks when the Shanghai premium (or any other physical gold price premium in emerging markets) is as large as it has been recently.
Moreover, because of the intense demand for physical gold we have seen so far this year, it is very probable that the bullion banks themselves are in a shortage of physical gold, hence the need to use the GLD reserves.

Indeed, since 2005, there has been a strong negative correlation between GLD flows and the Shanghai Premium (-53%) (Figure 4 above). This means that large outflows (redemptions) from the GLD are typically associated with high premiums in the Shanghai gold market. This association has been particularly marked since the beginning of the year, with historically large outflows corresponding to an all-time high in the Shanghai premium.

To conclude, the evidence presented here suggests that, contrary to what has been stated in the financial press, the flows out of the SPDR Gold Trust may have been generated by the bullion banks to take advantage of an arbitrage opportunity in the physical market. This arbitrage opportunity occurred because of the intense demand for gold stemming from Asia and the inability of traditional suppliers to provide this gold (hence the large Shanghai premium). We believe that this activity further supports our hypothesis that there is a lack of availability of physical gold and an obvious dislocation between the physical and paper gold markets.

In these conditions, it is not hard to imagine that prior to April 15, the bullion dealers, with their large resources, were tempted to sell large amounts of gold futures in order to lower the spot price and make the arbitrage even more profitable by increasing the spread and sparking a tsunami of buying in Asia.

To us, this is clearly a bullish signal for gold.

China Gold Acquisition Marches on

From Zerohedge:

 The premium that gold buyers in China pay to take immediate delivery of bullion has jumped four-fold in the last six weeks following the gold price 'crash'. As Bloomberg notes, even before the mid-April drop, China's gold imports jumped to a record in the first quarter as domestic demand (776 tons) outweighed domestic supply (403 tons). Images of consumers overwhelming jewelry shops were everywhere but the following chart clarifies just what the suspected gold manipulation did for demand as China's gold premium, while admittedly noisy, jumped from a long-run average of around $7 to over $32! As one analyst notes, the gold "premium is a function of demand and supply, and right now you could interpret the high premium in Shanghai as a sweetener to entice the overseas gold supply to flow into China."

 

And don't miss this from Peter Schiff on the Fed's Advisory Council release just this Friday:

10,000!

This blog just hit 10,000 views. I never would have imagined just eighteen months ago that my blog would have anywhere near that many views.

When this blog started it was meant for me to document what I believe is an economic period that will be discussed for the next one hundred years just as we still talk about the Great Depression in the US today. It was also meant as a way to communicate to family and friends my thoughts on the extraordinary macro economic climate we find ourselves investing in today.

That this blog is read all over the world is absolutely amazing to me. From my blog stats provided by Google I can see that views come from places as far away as:

Columbia
U.K.
Russia
China
Canada (well maybe not so far away)
Hong Kong
South Korea
Ukraine

Thank you viewers. If not for you, I'd likely have given up writing this blog. As it continues to grow I hope people will add comments, especially with regard to what they see happening in gold, from various parts of the world.

Something's About to Break

If you've read my posts about gold over the last month you know that while "paper gold" has been selling off (In the form of GLD) the physical gold market has been extremely strong. I have speculated that the GLD etf has been an important source of physical gold and that its decline was engineered to allow bullion dealers to get at some of the etf's physical supply (When GLD is sold off, the custodian doesn't need to hold as much physical gold to back its shares.) You'd also know that hot money is betting big on gold going down. Hedgies are short the GLD etf even as demand soars around the world.

Several recent posts provide important background as to what's going on behind the scenes.