Maguire: Absolutely, there's a Run on the LBMA & Gold Banks

First, if you are not up to speed on the GoFo rates, or have no idea what they are, spend thirteen minutes listening to Alasdair Macleod explain the current extraordinary situation and what it means for gold.

Interview starts at 13:04

Now, armed with that knowledge, listen to Andrew Maguire, also on the Max Keiser Report starting at 13:12

Clearly the Western central banks are in trouble. This is extremely important because if you believe gold retains its intrinsic value irregardless of fiat money printing going on around the world and bankster manipulation of the price of gold then you must conclude gold is very much under priced in the paper markets. This is well and good, but if manipulation was able to continue on forever you could stack gold for years and never benefit from an honest repricing of your gold holdings.

The end of that manipulation seems to now be coming to an end.

Trust In the Gold System is Breaking Down

I believe we are now at a very important moment where the price of paper gold is beginning to disconnect from the physical price of gold. Premiums for gold delivery on the Shanghai exchange are now a constant and bullion banks and the COMEX are low on physical inventory for delivery. Although its unlikely the US Fed, BIS or IMF would let a gold exchange completely fail, its likely at some point there will be only cash settlement. Remember, its thought that there are 100 paper ounce representations of gold for every real physical ounce in existence. That means, as I mentioned previously, when the music stops, there will not be enough real gold to deliver. The music may not be abruptly stopping, but I can hear it fading away.

From KWN:

 Kaye:  “Part of the reason we’ve had this smash on gold is because it was very important to the central bankers and to the BIS that gold and silver not be seen as a viable alternative currency.  The reality is that the physical above ground stock of gold only increases at roughly 1% to 2% each year,whereas the amount of digital money that is printed by the Federal Reserve of US dollars greatly exceeds that by a huge factor.

“Now the central bankers are devious but not stupid.  They know that what I just said is true and they know that the market will catch on to that very quickly, so it’s very important for them to manage and suppress the price of gold, and that’s what they have done through the paper market. 

Where the Gold's Going

Santiago Capital, right here in San Francisco has two great presentations on the current gold markets

The first  (10 minutes) reviews concepts familiar to my regular readers, while the second (6 minutes) expands on the first providing additional insight into where physical gold is going.

For newer readers these are a must watch.

Important Andrew Maguire Interview: The Run on the Gold Banks

Listen to it here.

The Run on the Gold Banks Continues

JPM Eligible Gold Plummets By 66% In One Day To Just Over 1 Tonne, Total Gold At Fresh All Time Low

Submitted by Tyler Durden on 07/19/2013 16:31 -0400



For over a month, JPMorgan managed to mysteriously avoid matching up the gold held in its (world's largest) vault with the Comex delivery notice update. However, as of today, that particular can will be kicked no more. Starting yesterday, JPM reported that just under 12,000 ounces of Eligible gold (the same Registered gold that two days earlier saw its warrants detached and convert to eligible) were withdrawn from its warehouse 100 feet below CMP 1. But it was today's move that was the kicker, as a whopping 90,311 ounces of eligible gold were withdrawn, accounting for a massive 66% of the firm's entire inventory of non-Registered gold, and leaving a token 46K ounces, or a little over 1 tonne in JPM's possession. 

On Shanghai, Gold Bifurcation and How Long this Farce Can Continue

Jan Skoyles from The Real Asset Company talks about gold bifurcation, huge deliveries in Shanghai and just how long this Comex cognitive dissonance between paper and physical can continue. Hat top to tfmetals who brought this to my attention.

The conversation starts at twelve minutes into the video.

Rick Rule: On Gold, Hand Holding and Becoming Wealthy

Its been a tough two years for gold and silver investors. Even while the fundamentals for owning them have gotten even better ($85 billion per month of new money creation and annual US budget deficits of $1 Trillion.) the prices have been pummeled lower, almost certainly through intervention of central banks and/or their proxies. If you didn't buy prior to the start of this blog you have almost certainly sustained paper fiat currency losses. That can be frustrating for anyone. But the title of this blog relates to long term wealth preservation not short term trades. Sometimes wealth preservation means avoiding shorter term risks (an overvalued equity market) in favor of longer term investments that are more backed by fundamentals. That means giving up speculative gains for likely, longer term certainty and gains.  Below, Rick Rule, who has been through more market cycles than I explains the wisdom he has acquired over the long term that made him a wealthy investor:

From KWN:

Rule: “You know, Eric, it’s funny because right now I am up in Vancouver, and looking at the despair in the professional investment community and juxtaposing that with the strange elation that I feel has caused me to feel very contemplative.

One of the things that occurs to me is that this is my fourth major market cycle.  The three previous down-cycles that I’ve been through previously were the cause of my personal wealth, and Eric Sprott’s personal wealth....

“It’s interesting that at age 60 I have a lot more patience than I did when I was age 30.  And I think one of the things that’s happening right now is the fact that markets and conditions have caused me to be a 3-to-5-year thinker, and most of the people I compete with, who are 20 years younger than me, have a 2-to-3-week time frame.

And the idea that somebody who has a 2-to-3-week times frame can compete with somebody who has a 3-to-5-year time frame is very problematic.  What Eric and I are trying to do in very crass terms is go from being quite wealthy, to being ludicrously wealthy. 

But the reality is that we are competing with people who are trying to make payments on their 2nd house at Whistler.  In other words we are competing with people who are trying to live rich as opposed to being rich, which constrains them to a very, very short time frame.

Certainly I feel bad about having paid $3 for some stock that is selling at 60 cents, but it’s not the first time I’ve ever done that, and it’s certainly not the last time I am going to do that.  But what I can tell you is that the money I’ve made in my life has come about through the aggressive deployment of capital at times like these. 

This is the case even though I may lose more capital in some of these, but also understanding the incredible increase in value that one gets by maintaining a 2-year, 3-year or a 5-year time frame in markets where your competition is so despairing that they are worried about how they are going to get through month-end.”

Eric King:  “Rick, is this one of the greatest opportunities you’ve ever seen in your entire career?”

Rule:  “I think so.  This is my fourth major downturn, and in the first one I was really terrified because I hadn’t been through it before.  But in the last three downturns I have known in every case that bear markets cause bull markets and that I was going to come out of it doing very well.  I just didn’t know how well or how long it was going to take.

I need to tell you that in each prior instance that I came out of it doing much better than I anticipated, and this time I believe that I am going to do incredibly well coming out of this market.  Your readers need to remember that neither want nor hope are investment techniques, they are emotions.  KWN readers need to think as opposed to wanting or hoping.  And if they do that, and they lengthen their time frames, they will do much, much better with their portfolios as this market turns and heads to the upside.”

Rule also added: “We need to remind ourselves, Eric, that the narrative with regards to precious metals has not changed between 2010 and today.  The only thing that has changed is the price.

In Case You Missed it: The Secret World of Gold

In light of recent events, this CBC documentary is more relevant than ever. Where is the gold?

My regular readers likely already know.

Paper Gold on the Comex Vs. Physical Gold in Shanghai

Since starting this blog gold bifurcation between physical and paper has gone from theoretical to reality. The only remain question going forward is by how much and how fast. As the post below from Real Asset Co shows, the mechanism is already there. There are to stark differences between two global gold markets: the COMEX in the US and the SGE in Shanghai.

Chinese gold demand, from both individuals and central banks, garnered increasing attention as the gold price rose consistently in the last twelve years. When the gold price declined, many in the West declared the end of gold, but China (along with many other Asian nations) defiantly continued to buy gold and increase their imports.

Questions over the legitimacy and transparency of COMEX and the London Gold markets are now becoming louder, especially as increasing numbers of institutions are keen to know what actually backs those contracts. ‘Paper gold’ is on everyone’s lips.

Hey Merkel, Where's Germany's Gold?

William Kay says he knows:

Kaye:  “Global hegemony (leadership or dominance) is changing in a way that most people don’t fully comprehend.  This area of the world, the Asia-Pacific, China in particular, is positioning itself to be the leading global power as we look out over the next five to ten years.

My sources tell me that contrary to the public numbers that are available, China has anywhere between 4,000 to possibly 8,000 tons of (physical) gold....

“They are not only the world’s largest producer of gold, but they are the largest importer of gold in the world.

$1.8 Trillion spending to create $320 Billion of GDP

In September of 2012 I wrote a post titled, Money Going Down a Black Hole in which I explained that Democrats, Republicans and the Federal Reserve were operation under the Keynesian notion that deficit spending was justified in a recession, depression or financial crisis to kick start the economy. The basic idea is that $1 of deficit spending would have a multiplier effect of greater than the $1 spent and result in higher economic activity.

The 2008 stimulus was based on this idea and projected a multiplier of 1.5, meanin for every $1 spent we would expect to see $1.5 worth of additional GDP. This didn't happen and John Cochrane put it closer to point five (.5). Biderman noted at the time that is was closer to point two (.2) which meant that it took a dollar of deficit spending to create 20 cents of new economic activity measured as GDP.

In the post above Biderman revisits this concept and notes its now barely .18. That's right, it now takes $1.8 Trillion to boost GDP by $320 Billion.

This is not only unsustainable, but points to diminishing marginal returns. The longer we continue creating and spending new money, the less effect it has on the economy. And of course, there is always the notion that we cannot print money forever.

Conclusion, this farce of a recovery will come to an end at some point. And when it does, we will be worse off, broke and our currency will be significantly devalued.

Ned Naylor-Lyland on the Run on Gold Banks

Scribd doc can be found here.

First a refresher: Backwardation  refers to the market condition wherein the price of a forward or futures contract is trading below the expected spot price at contract maturity.With gold in backwardation one would expect institutions to buy gold today to deliver in the future at a higher price. Ned describes how backwardation of contracts should be a temporary phenomena that is arbitraged away. The fact that forward and futures contracts remains in backwardation implies a shortage of physical gold available to be delivered later. It also implies a premium for having physical gold now rather than the promise of gold in the future.

Ned Leyland from Cheviot Asset Management on the run on gold banks:

Gold Update

In light of the deep sell-off in the Gold price, I present 3 charts to clarify what has (and hasn’t) happened. Chart 1 is a chart of Spot Gold, the second an illustration of what makes up the daily ‘Gold’ market, the third shows the enormous flow of physical metal from West to East in the context of Global mine supply. There is an ongoing clash between the forces of paper supply and physical demand – paper supply has won the latest round, but its objective of satisfying and slaking demand for the real metal has failed entirely. The spot price graph is annotated with events that have happened since Q3 2012. All of these points (1-6) seem pertinent when evaluating the sell-off in paper Gold, but none more so than the entry of the Gold market into a state of permanent backwardation around a year ago (1). With vast above ground inventories (supposedly) available to borrow, the Gold and Silver markets should not offer a risk-free arbitrage for any amount of time. The fact that it has remained and widened over a year indicates that the physical market has tightened up substantially, a postulation that is corroborated by the growing premiums being paid in Shanghai and Delhi (in Delhi dealers are paying over a 25% premiumfor NNS 8g fine Gold vs 2% in Q4 2012) and the ongoing wholesale delays in the delivery of substantial bullion tonnage (2 tons or above).

China Understands the Gold Game

Because I couldn't have written it better, below is cut and pasted from Zerohedge:

Sometimes, such as after pervasive liquidations in precious metals (or is that AAPL? Has it become clear yet that with widespread "quality" collateral shortages, gold and AAPL stock have become unexpected and almost interchangeable collateral replacements) it is easy to lose sight of the forest for the trees. A forest, in which the New York Fed is procuring (through the open market) the rehypothecated gold that the Bundesbank demanded for repatriation in January; in which JPMorgan's gold holdings have plunged by 75% since said stunning Bundesbank announcement and hit new record lows on a weekly basis paradoxically just as the price of spot gold keeps sliding ever lower; and in which China is importing unprecedented amounts of gold and adding more and more each month. So let's do a quick refresh on the forest, shall we.
Here is what we discovered in September 2011, as part of Bradley Manning's trove of declassified US cables. From Wikileaks:

3. CHINA'S GOLD RESERVES

"China increases its gold reserves in order to kill two birds with one stone"

"The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): "According to China's National Foreign Exchanges Administration China's gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB."

And now for some empirical trees.

While we don't know how much of the several hundred tons that Jens Weidmann has demanded for delivery from Liberty 33 has already been purchased and/or delivered, we know one thing: since publishing the Wikileaks disclosure China has imported nearly 2,000 tons, and just under 1,500 tons since January 2012...

... and that Chinese gold imports in 2013 continue to surpass those from 2012 "despite" the violent slide in the gold price - almost as if unlike E*trade momentum chasing babies, China buys more the lower the price drops.

In other words, China - pragmatic as always - decided to call the "rising gold price suppression" bluff of the US and Europe and do the only logical thing that takes advantage of an artificially suppressed gold price: buy hand over fist.

As for everyone else selling their (mostly paper) gold over fears that this time, unlike the previous two, Bernanke will actually stop monetizing debt and in the process eliminate all concerns of monetary collapse, China is happy to wave it in (and why not: it is only a matter of time before the taper makes way for the untaper).
Finally, we concluded our previous post looking at recent gold technicals with the following rhetorical question:

Someone more inquisitive than us may wonder: just where is all this gold being "withdrawn" to...

Rhetorical, because we have a very good idea where this gold is going.

And don't miss this:

 

JP Morgan Vault Gold Drops To New Record Low; Brinks Gold Plunges By 24% In One Day

 

Last week we defined the golden sentiment rule as "anything that isn't off the chart soon will be." This will happen in a "perfectly sustainable" fashion, where increasingly more paper gold is shorted to record levels even as actual physical holdings held by official Comex vaults continues to drop. For one particular reason why the price of paper gold may be at 3 year lows, we will provide some formerly classified perspective shortly in a post. But in the meantime, and while we await the weekly CFTC commitment of traders report (delayed until Monday due to the July 4 holiday), we are happy to report that the JPM disconnect between the epic delivery requests and its reported gold holdings (for which the "Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness") reconnected modestly, and as per the latest Comex update, another 6.8k ounces of gold was pulled from JPM's 1 CMP world's biggest gold vault, dropping its total gold inventory to a fresh record low.

Perhaps even more notable is that on Friday, that "other" depository, Brink's, saw 24% of its entire registered gold holdings, or 133k ounces, quietly get withdrawn. This, together with the moves in JPM and HSBC inventory, meant that total Comex gold holdings dropped by 116K ounces to a new low not seen for the first time since 2006.

Finally, for that all important marginal source of paper gold supply or demand, ETFs,the two largest ones (GLD and IAU) have now retraced 50% of their "holdings" gain since the fall of Lehman.


Someone more inquisitive than us may wonder: just where is all this gold being "withdrawn" to...

Maguire on Last Week's Gold Action

Below is the text from a KWN interview with Andrew Maguire on last week's gold action. As you read, notice the amount of gold redemptions from ETF's compared to the amount of gold purchased by Eastern central banks in a similar period. And recall my thesis that paper gold price is being attacked to make more physical gold available from these ETF's when traders & investors sell the funds. Remember, with a open end ETF, the custodian must buy or sell the underlying metal to create or destroy shares so that the gold ETF's match the gold price.

Also notice how he mentions that from the perspective of the central banks (and also the Bank of International Settlements) the cross between the dollar and gold is just another currency cross. That is, just as central banks regularly and openly intervene in currency markets between, say, Japanese Yen and US Dollars, they also intervene in crosses between currencies and gold. Though Bernanke may not admit that gold is money, their policies and interventions in the gold market indicate otherwise.

Also, you may remember in my post about the BIS rejecting gold as Tier 1 capital. Had they allowed gold as Tier 1 capital it would in essence have admitted gold IS money and increased its desirability. Certainly that would not have been in the interests of Western and Japanese central banks.

"Buy Now While Supplies Last"

First let me apologize. In my last post I did not differentiate between the significance of both last Thursday and Friday. Explaining will make sense of the price action. Options and Futures on gold expired last Thursday which is why we saw the paper gold price being "attacked". Bullion banks desperately wanted to push down the price to 1) discourage physical delivery of the contracts and 2) push more people out of the GLD exchange traded fund which results in the fund having "excess physical" gold thy can make available to metals exchanges or bullion banks. Friday was the last day of trading for the second quarter marking the price that all anti gold news would use to mark the down quarter for gold as I predicted. But by Thursday the damage was done and the "paper gold attack" was over and gold price rose. As a result we predictably got this headline from CNBC:

Luster Gone: Gold Posts Worst Quarter on Record

Were you scared out of your gold? They certainly hope so, because the music seems to be stopping as I posted June 11th.