Tuesday, June 11, 2013

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.

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