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Monday, May 20, 2013

Is A Force Majeure Of The Comex Gold Exchange Really Just A Tinfoil Hat Theory?

On Thursday Reuters reported again on the tight supply conditions out of Asia. The story in the press has been reported as “high premiums for physical” but in reality the following quote is more descriptive.”Honestly, we don’t have enough physical gold to supply to the Chinese,” said a dealer in Singapore.  ”This is mad.”

Such stories are widespread and extend even to South Africa. According to the U.S. Census Bureau’s foreign trade division, 20,013 kilograms of unwrought gold worth $982 million left New York’s Kennedy International Airport for somewhere in South Africa ["Is South African Mint Short of Gold?"].

I’ve been posting articles on the complete stoppage of delivery to the Shanghai  Gold Exchange (SGE). Night after night there have been no deliveries made. The gold is “somewhere else.” Thursday, before the Friday POG dump du jour, demand was picking up again as 19,527 kg traded in the Au 9999 class. Then ignoring Chinese demand after the Shanghai closes, the bear raids commence. At least Chinese grannies who missed the first swoon will get a second chance. With the extreme shortage of actual gold available — if we get another spike over 25,000 kg in SGE demand — the paper gold tigers kiss their crazy asses goodbye.

The other story that gets big play in the American press is the large-scale dumping of the gold ETF by institutional investors. This is now an old story. The GLD ETF coughed up 96,000 oz in Friday’s rout. That’s not completely inconsequential, but since I’m  convinced that this bear attack is designed to spook ETF holders out of gold shares that can be exchanged in 100,000 share lots for physical, this is really not much of a take. So the whole institutional dumping story is exaggerated at this point. The way the market traded Friday, I was expecting more. The managed-money Boyz may have spit out some more paper contracts, but those players are already at the lowest levels of paper gold exposure since the gold bottom of late 2008 (see last chart).

The open interest of June contracts that have not yet rolled over into August is another marker. We are two weeks from first notice on May 31 and 195,938 June contracts (19.594 million oz) remain outstanding.

Harvey Organ calculates that an extremely high 301,900 oz is standing for delivery next week as the off month of May closes out.  That’s 10x normal for May. June is the big month. Although the sentiment in the gold bug community is that this is a manipulation, more and more I think the apt description is that a whale(s) or rogue traders are aggressively shorting into an otherwise solid “market”.  These Boyz are more nuts or loucura than crafty.

Another indicator is the low inventories on the Comex. Gold bulls are pointing to this, suggesting that the Comex is in trouble. Detractors claim that this has happened before. Although gold rallied, the Comex survived a force majeure and scandal. Yes, as the charts below show, there has been less registered gold in Comex warehouses before (in July 2011 and February 2010, for example); and, yes, the Comex and paper-gold scheme made it through.

There’s a key distinction this time, however. In prior inventories-on-fumes episodes, there was a lot more producer hedging in place (see producer CoT position last chart), and thus there was steady delivery of a real product — actual physical gold. Today, we have a completely different setup: There’s little producer hedging.

On the chart below, the last digit (0) is slightly cut off; but it indicates in February 2010 that there were about 140,000 contracts hedged by producers. In July 2011, there were 200,000 or 20 million ounces. Hedged gold translates into delivered gold to the Comex warehouse. Today, there are only 27,066 (2.7 million ounces) hedged, and this is spread out for delivery over months and even years. Further, the CoT data indicates that in the week ending Tuesday, May 14, producers closed out a whopping 1.04 million ounces of hedges.

This may also suggest that gold producers prefer to sell their gold elsewhere and bypass the Comex altogether as a legitimate place to conduct business. I truly believe that the poorly regulated Comex is suffering reputational risk and is a hollow, corrupt example of the original purpose of a commodity exchange. Since there no price discovery on the Comex, it wouldn’t surprise me if virtually all producer deliveries disappeared simply because there are better prices to be had in the physical gold market.

The commercial and producer indicator on its own is very bullish, but this seems especially so today because of its challenge to the paper gold Comex “market.” Detractors who call the force majeure prospect a tinfoil-hat theory would be well advised not to simply dismiss this development.

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