Tuesday, December 24, 2013

U.S. Treasury 10 Year: Interest Rate now above 2.9%

Interest rates have been climbing in recent weeks.  Rates may be reacting to the Federal Reserve Banks recently announced plan to decrease or taper monthly quantitative easing by $10B.  The Fed has been buying an average of $85B per month of US Treasuries and Mortgage Backed Securities during 2013.  The Fed plans to purchase "only" $75B per month going forward.

As a buyer of US Treasuries, the Fed creates additional demand which depresses interest rates.  To say it another way, the US Treasury would have to offer higher interest rates in order to entice more buyers if the Fed were not in the market.  The Fed's purchases are so significant that it currently owns 18.8% of all treasuries http://www.zerohedge.com/news/2013-12-04/feds-impersonation-hunt-brothers-continues

If interest rates continue to climb it will depress economic growth and employment.  Home and auto loans will be more expensive, for example.  And, a larger portion of the US Government's budget will be spent on interest servicing the debt instead of expenditures that grow the economy, such as salaries and fighter jets.  The Fed will likely not allow rates to increase much more for fear of hurting the economy.  Perhaps the Fed has another idea or name for injecting more money in the economy, but effectively taper plans will not be implemented.  Long live the taper.

It is difficult to understand why anyone would buy a US treasury bond if about a third of the issue is being purchased by the Fed.  No way buyers receive a fair price or interest rate while such a large, conflicted, insider is dominating the market.  Presumably buyers simply do not have anything better to do with their money.  They could invest it in equities, or real estate, or art, or classic cars!!  . . . which is exactly why these asset classes have appreciated dramatically over the last 2 years.  Precious metals are another investment option.  Central banks through the bullion banks have actively depressed gold prices to discourage precious metals as an alternative.  

Tuesday, December 17, 2013

COMEX Gold Futures Settlement Activity - 200k more ounces, 5X more than last year

2,076 Dec-13 gold future contracts remain as open interest waiting to be settled as of Monday December 16th.  This remaining amount is down from first notice day when 10,157 contracts were filed on November 27, 2013.  

Each contract is for 100 ounces of gold so 207,600 ounces must still be settled from registered inventory which currently sits at 604,944 ounces.  Settling the remaining ounces may not be as straight forward as it first appears.  No doubt the COMEX and its bullion banks will pull it off.  But, the degree of difficulty is increasing, especially compared to last year.

JP Morgan's House Account probably already owns most of the registered gold in inventory.  Since the beginning of this contract month when there were 590,817 registered ounces in inventory, JPM has stopped or taken delivery of 493,500 ounces.  When taking delivery JPM receives a warrant that is title to the registered ounces.  The issuer or seller transfers ownership of registered gold already in inventory to JPM via the warrant.  In this way ownership of existing registered inventory is transferred and inventory balances are not affected.  So had there been no deposits or withdraws to/from registered inventory this month to date and if JPM owned no registered gold at the beginning of the month, JPM would now own 84% of the registered inventory.  That would leave only 16% or about 97k ounces for all other firms.  

JPM has stopped 95+% of notices month to date, so JPM probably does not have short positions that would require issuing gold before year end.  In that case, other firms will be the issuers of the remaining 2,076 contracts.  And, yet they have an estimate 97k ounces of registered gold.  Tilt!  There have, however been some deposits and withdraws to/from registered inventory, so they probably have it covered this month.  Don't expect a delivery default this year.  Too bad COMEX reporting is not more detailed!

Settling the Dec 2012 contracts was much easier.  First, there was over 2.5M ounces or registered gold inventory at the end of November 2012 over 4 times the amount this year.  Second, only 6,999 contracts were filed on first notice day which is about 30% less than for Dec 2013.  Finally, 3,862 contracts were lost in the first week after first notice day compared to 3,463 lost contracts so far this December. So in the end 3,253 delivery notices were filed in 2012 while in 2013 4,614 have been filed so far and there are another 2,076 to go.  Note that last year and so far this year very few contracts were lost after the first week.

The term lost is borrowed from Harvey Organ.  It refers to a contract that filed for delivery during the notice period but then did not stand for delivery.  Lost contracts are presumably settled another way, possibly with a further-out futures contract, cash, eligible gold, GLD or some other exchange for related position (EFRP).

This December has been much more challenging for COMEX to settle all contracts as evidence by the large amount of open interest remaining this late in the month.  They will pull it off this month.  The next big contract month is February which currently has 231,910 contracts open interest, which is comparable to the open interest for December contracts a month ahead of time.  Expect to see significant additions to registered inventory before the end of February.  

Friday, December 6, 2013

Rik Green's Investors Forum Growth Portfolio down 5% in November, 17% YTD

Rik Green's growth portfolio <Port-faux-lio> lost 4.8% in November to reach a new low.  The S&P500 gained 2.8% during the month.  CVX which is 40% of the portfolio's value was up 2% and helped offset a 5% and 9% drop in gold and silver prices, respectively.  GG which is 20% of the value dropped 12% during the month.  PSLV, PHYS, CEF, CDE, SLW and AUY all lost about the same as their underlying precious metal.  

Year to date the port-faux-lio is down 16.5% and the S&P is up 26.6%.  Gold and silver ended November at $1,253.35 and $20.00, respectively which is down 25% and 34% year to date.

Last month I was tempted to trade even more CVX for gold and silver related investments because CVX had appreciated and gold and silver were beaten down.  I decided to wait because the portfolio is running low on 'powder.'  There is not much CVX left to keep re-deploying.  Now is an even better time make this trade because CVX is a bit more valuable and the precious metals have been pummeled even further.  The beating has been so bad that I fear it may never stop.

What's the old investment adage; "buy when there is blood in the streets."  Of course in order to follow that advise one must have value to buy with.  It's not that bad yet.  My powder is precious, so I am going to wait a while longer.  If the metals take off from here I will celebrate gains on what I did do and have no regrets for not doing more.

Thursday, December 5, 2013

Major Gold Miners Q3 Financial Results: 4% growth, Operating in Black, $936 Cost Per Ounce.

4 Major Gold Mining Companies Achieved 4% Growth in Q3
Total production of gold or Gold Equivalent Ounces (GEO) depending on what the company reports increased by 4% over Q3 2012.  Each of the 4 major gold miners on my watch list is well on track to meet production estimates for 2013 that were communicated in mid-2013.  Yamana recently started production at a new mine that will add to growth in Q4.  Earnings from Operations at each of the 4 were in the black.  The average realized gold sales price during Q3 was about $1,330.

No-Growth Miners Generating Cash
Barrick (ABX) and Newmont (NEM) have poor growth prospects.  Free cash flow for ABX and NEM was positive in Q3 due capital spending reductions.  Goldcorp (GG) and Yamana (AUY) continue to invest in growth and reported negative free cash flow.  Free cash flow is Net Cash Flow From Operations less Capital Expenditures.

All In Sustaining Cost (AISC) Reduced to $936/ounce
The weighted average AISC for these four miners in Q3 was $936 per ounce, down from $1,043 per ounce in Q2.  AISC is a new industry (not GAAP) metric.  AISC includes by-product credits and sustaining capital.  It excludes new project and exploration capital and expenses.  More detail is available via the World Gold Council:  http://www.gold.org/media/press_releases/archive/2013/06/guidance_note_on_non_gaap_metrics_pr/

Industry Viable When Gold >$1,300
Q3 financial results show that these miners are viable when gold sales prices are $1,300 per ounce.  In Q3 gold sales averaged about $1,330 and the miners generated free cash flow while spending enough capital to grow production.  The miners could respond to lower gold prices by reducing capital expenditures even further as evidenced by their reported AISC.  Less capital spending would come at the expense of future production.  If miners get really desperate they can high-grade or produce at only higher grade deposits, which would lower total gold production.

US Mint Gold Coin Sales Steady in November. Silver Eagle Sales Drop.

Sales of gold Eagle and Buffalo coins by the US Mint were 62,000 ounces in November, compared to 66,500 in October and 23,000 in September.  November gold sales were 60% less than in November last year which was an exceptional month.  As of November, year to date gold sales are 1,032,500 ounces which is 29% more than in 2012 and 5% less than in 2011.  The US Mint reported November sales of 14,000 gold Buffalo coins and 48,000 ounces of gold Eagle coins.

Sales of silver Eagles by the US Mint were 2,300,000 in November, compared to 3,087,000 ounces in October.  November sales were by far the lowest month of this year.  Sales in November were 27% less than in November 2012.  Year to date silver Eagle sales are a record 41,475,000 ounces which is 29% more than 2012 and 10% more than in 2011.  The Mint has sold the most silver Eagles in 2013 than in any recent year.

The US Mint reduced the retail price for an uncirculated Gold Eagle from $1,625 to $1,525 during November.  And, the US Mint's website currently (Dec 5th) states that uncirculated gold Eagles are sold out.  An uncirculated silver Eagle retails for $43.95 which is unchanged from July, August, September, and October.

A quick survey of 3 internet coin dealers currently shows premiums of about $4.00 for silver Eagles.  Unlike last month the coin dealers are now quoting prices that are very close to each other.  The premium for gold Eagles is about $60, which is slightly less than last month.  These price premiums are based on purchasing one coin.  All dealers offer volume discounts for larger purchases.  Spot gold and silver market prices are currently $1,233 and $19.70, respectively.

Coin dealers are currently offering to pay about $20.00 and $1.90 over spot to purchase gold and silver Eagles, respectively.  This seems reasonable because the US Mint charges dealers 3% for gold and $2.00 per coin for silver.  Dealer purchase premiums are not hinting at supply constraints as they were in April and May.

Monday, November 25, 2013

Gold Market Halted by Large Sell Order, Again!

Zerohedge reports that last night a sell order for 1,500 contracts worth about $180M was dumped on the gold futures market.  Gold price dropped about $10/ounce in response and market halts triggered stopping trading for 20 seconds.  Now (as of 10am eastern) gold has rebounded to above $1,240 where it started the day.

It's deja vu all over again.  The gold market did the same thing last Wednesday, November 20th.  1,500 contracts sold; halted market for 20 seconds; price rebounded quickly.  Then, last Wednesday a second large sell order hit the market in the afternoon which smashed prices $15 to $1,245.  Gold prices stayed down after the second beating of that day.  

Will we see a second blatant sell order this afternoon as we did on the 20th?  The beatings will continue until morale improves.

Today, Monday November 25 gold and silver option on the COMEX expire.  Wednesday November 27th is the first notice day for COMEX December gold and silver contracts.  That is the first day that holders of December dated futures contracts can provide notice to the COMEX that they are standing for delivery.

COMEX registered gold inventory is 589,414 ounces or 18.3 tonnes.  Total December future contracts or open interest as of Friday evening was 104,270 for 10.4M ounces.  There are 100 ounces per contract.  Only 0.6M ounces are in inventory to cover a potential demand of 10.4M.  The demand or open interest is, however falling quickly as is typical just before a notice period especially with falling prices.  On Thursday and Friday open interest for December futures fell by 23,784 and 22,313, respectively.

Wednesday, November 20, 2013

Signs of Desperation from the Gold Cartel

Someone dumped 1,500 Dec gold contracts on the COMEX this morning that smacked-down the price and caused a 20 second market halt.  This is the third time in about 2 months that large sell orders have triggered stop logic on the COMEX.

Reading from the charts that Zerohedge provided gold prices fell about $12 per ounce and have since recovered about have of the drop.

Hopefully, these are signs of desperation on behalf of a gold cartel that is clearly, actively suppressing market prices:
- the front month (December) contracts were attacked.  
- increasing frequency of the attacks
- gold price recovered quickly after the smackdown

1,500 gold contracts * 100 ounce/contract * $1,270/ounce = $190.5M.  Suppressing gold prices discourages an alternative to debt and equity markets.  $190M is a small price to pay/invest for a cartel that has been spending $85B per month to maintain confidence in those markets.  

I am getting tired of lying against the ropes and taking these punches.  Let's hope they have almost punched themselves out so that we can 'rope these dopes'.

"You have no power.  You can't hit.  You swing like a sissy."  Muhammad Ali said to George Foreman before their famous rumble in the jungle boxing match.

Thursday, November 14, 2013

Conspiracy for Sale $831M

COMEX gold inventory on November 8th was 19.9 tonnes which amounts to $830M at $1,300 per ounce.  So if someone purchased $831M of gold futures and stood for delivery of all 19.9+ tonnes the COMEX would be forced to settle some of those futures in cash.  When the COMEX paper gold market is shown to have no physical gold backing it the price of physical will jump and reveal the gold price suppression conspiracy.  Cash settlement will likely be at 'before' prices.  But the buyer will realize a nice gain on the physical gold that they were able to receive and get their money back on the ounces that are cash settled.  

Surprisingly no ambitious hedge fund has tried this yet.  Since most hedge funds have about 4:1 leverage it would take them only $170M of equity.  Didn't Steve Cohen of SAC Capital just sell some artwork for a couple hundred million?  What is keeping George Soros, Kyle Bass, John Paulson, Carlos Slim or some other 21st Century version of the Hunt Brothers from giving it a go?  They've thought of it - or I charge only a small finders fee, just enough to wet my beak!*

Financiers looking at cornering the COMEX gold market must think that 1) the COMEX can get more bullion quickly and/or 2) cash settlement of COMEX futures would not send the physical price skyward and/or 3) selling their recently purchase 19.9 tonnes would tank gold prices when they try to cash out.  Could cash settlement already be built in to the price?  I doubt it.  And, if it is purchasing the last of COMEX's bullion at paper prices would be a fantastic investment.  Where could the COMEX get more bullion?  GLD?  the US Treasury?  The GLD ETF self-reportedly has 866 tonnes of gold.  And GLD's gold is conveniently stored at the same bullion banks who warehouse the COMEX's registered and eligible gold.  Selling 19.9 tonnes of gold without depressing prices should be easy since China is purchasing over 100 tonnes per month these days.  

What am I missing?  Perhaps anyone and everyone who can come up with $831M is not greedy enough to upset the apple cart.  LOL!!!!!

*The Beakwetter.  JP Morgan should hire whoever produced this video to manage their Twitter presence;-)

Tuesday, November 12, 2013

COMEX Dec Gold Future Contracts OI Down 30% While Registered Inventory is Down 75% from 2012

The current number or open interest (OI) of COMEX gold future contracts for December 2013 delivery is 183,966, which is 30% less than at this time last year.  COMEX future contracts are for 100 ounces.  If all of the current December gold futures contract owners stood for delivery in December the COMEX would need to deliver 18.4M ounces or 572 tonnes.  For reference, about 3,400 tonnes of gold are mined annually worldwide http://pubs.usgs.gov/of/2013/1091/OFR2013-1091.pdf  

The COMEX currently has 223 tonnes of gold stored in its custodian's vaults.  203 tonnes of this gold is reported as eligible, which means that it is owned by others who have warrants to claim it.  The COMEX vaults are storing this gold which is 'eligible' to be reclassified as registered gold in the event that the owner decides to sell it.  20 tonnes of the COMEX inventory are currently registered and available to deliver to futures contract holders who stand for delivery.

The COMEX has 20 tonnes of gold to cover a potential demand of 572 tonnes in December alone.  The situation seems extreme.  But, somehow the COMEX has avoided a delivery default and cash settling future contracts in all previous months.  December contracts are very popular so a comparison to last year at this time is more instructive than comparisons to previous months of 2013.  

Going in to year-end the COMEX currently has proportionally fewer ounces to cover December contracts.  Open interest for December contracts is down 7.8M ounces or 30% from this time last year.  And, inventory of registered gold is down 1.9M ounces or 75%.  The charts of COMEX registered gold inventory over time that Jesse publishes show that about 1.0M ounces were added to inventory in mid-December last year.  Then the inventory dropped back down by 1.0M ounces in January 2013.  This gold was presumable delivered to Dec 2012 contract holders who stood for delivery, but one cannot be sure.  It must be possible for the COMEX to negotiate delivery from other sources of gold to satisfy delivery demands, as well.

All I want for Christmas is for just 10% of the December contract holders to stand for delivery and publicize when the COMEX forces them to settle for cash instead of bullion.  This charade has gone on long enough!      


Thursday, November 7, 2013

Direct Registering Shares - Update on My Experience

Many months ago I researched the pros and cons of direct registering shares instead of holding them at my broker in street name <How to 'Own' Securities>.  The table below is a summary.  In order to gain more experience with it, I transferred some of my long term investments to direct registration.  It was the right move.  Once discovered the process was very straight forward and no cost.  

In order to direct register shares, the shares must be transferred to the company's transfer agent.  Chevron (CVX) and their transfer agent ComputerShare are an example.  Frustratingly, ComputerShare will not create a new account unless they already have your shares.  Their service is aimed at company (e.g. Chevron) employees who may want to start a Dividend Reinvestment Plan (DRIP) or direct purchase more shares.  This was especially frustrating because in order to transfer shares out of my brokerage accounts the instruction forms require that an account name and number be provide for the 'transfer to'.  The name must be the same owner/beneficiary as on the brokerage account.  The transfer instruction forms are typically used to transfer securities from one broker to another.  

Fortunately, one of my three online brokers knew that ComputerShare would create a new account if we submitted the paperwork without a ComputerShare personal account number.  Instructing my broker to transfer my shares out into the ether without a specific destination was a little worrisome.  But, as promised within 2 weeks ComputerShare sent my new account information and password.  The correct amount of shares were in the account.  On the next quarterly dividend date the correct amount was paid to my bank account as instructed.  

ComputerShare could be much more helpful.  Their phone help did not understand the concept of direct registration in relation to street-name.  They couldn't tell me how to instruct my broker to transfer shares to CompuShare without an account.  And, then they wouldn't create a new account.  None of this information is available on their website.

One can understand why my brokers obscure the process for transferring assets out of their domain.  Two of my three brokers even charge a fee.  The broker that successfully transferred my CVX shares to ComputerShare for no cost is now doing most of my businesses including trading. Transferring shares to my now preferred broker from the other two was very straight forward via standard forms on the brokers websites.

Hopefully my experience will help you decide how to best protect your assets.

Ownership Model
Street Name
Direct Registration
(Transfer Agent)
SIPC up to $500k
No SIPC.  No FDIC.  Investee’s discretion
High: ownership transferred by broker
Medium:  must instruct broker to use Direct Registration System (DRS)
Investee-Investor communication
Administered by broker
Pledging securities as collateral
Creating a margin account
Not available
Receiving interest and dividend payments
Broker is added step in payment chain - delays possible
No delays
Administration regulated by
Record keeping
Book entry.  No paper.
Investee's Register.  No paper.
Corporate governance
Easier for investee to go dark with fewer registered owners.
More difficult to avoid mandatory disclosures.

Rik Green's Investors Forum Growth Portfolio down 1% in October, 12% YTD

Rik Green's growth portfolio <Port-faux-lio> lost 1.2% in October while the S&P500 gained 4.5%.  CVX which is 38% of the portfolio's value was down 1% and GG which is 22% of the value dropped 2% during the month.  Gold was flat and silver gained 1% and 8%.  PSLV, PHYS, CEF, CDE, and AUY all moved about the same as their underlying precious metal.  SLW was down 8% which is odd because silver was up 1%.  

Year to date the port-faux-lio is down 12.3% and the S&P 500 is up 23.2%.  Gold and silver ended October at $1,323 and $21.91, respectively which is down 21% and 28% year to date.

In mid-May and August the port-faux-lio traded some CVX shares for more gold and silver related investments.  The trade does not looks so good right now as CVX is currently about flat with its sale price, but SLW, CDE, AUY, and PHYS are down.  This is a good time to triple down, because CVX is still over $120 per share and the precious metals are beaten down.

Monday, November 4, 2013

US Mint Sales of Gold Coins Recovered in October. Silver Sales Steady.

Sales of gold Eagle and Buffalo coins by the US Mint were 66,500 ounces in October, compared to 23,000 in September and 21,500 in August.  October gold sales were 5% less than in October last year.  As of October, year to date gold sales are 970,500 ounces which is 50% more than in 2012 and 7% less than in 2011.  The US Mint reported October sales of 18,000 gold Buffalo coins and 48,500 ounces of gold Eagle coins.

Sales of silver Eagles by the US Mint were 3,087,000 in October, compared to 3,013,000 ounces in September.  October sales were slightly higher than September which was the lowest month of this year.  Sales in October were 2% less than in October 2012.  Year to date silver Eagle sales are a record 39,175,000 ounces which is 39% more than 2012 and 7% more than in 2011.  Silver is on track for a record year.

source: http://www.usmint.gov/about_the_mint/index.cfm?action=PreciousMetals&type=bullion

The US Mint maintained the retail price for an uncirculated Gold Eagle at $1,625 during October.  An uncirculated silver Eagle retails for $43.95 which is unchanged from July, August, and September.

A quick survey of 3 internet coin dealers currently shows premiums of about $3.00 to $4.50 for silver Eagles.  This is a wide spread.  Dealer prices are usually closer.   The premium for gold Eagles is about $65.  The premium for gold and silver Eagles is about the same as last month.  These price premiums are based on purchasing one coin.  All dealers offer volume discounts for larger purchases.  Spot gold and silver market prices are currently $1,320 and $21.84, respectively.

Coin dealers are currently offering to pay about $25 and $1.75 over spot to purchase gold and silver Eagles, respectively.  This seems reasonable because the US Mint charges dealers 3% for gold and $2.00 per coin for silver.  Dealer purchase premiums are not hinting at supply constraints as they were in April and May.

Wednesday, October 16, 2013

Gold Price Manipulation Receiving More Press

Last Friday gold prices were smacked-down on the COMEX by a huge sell order.  More details are posted here: http://rikgreeninvestorforum.blogspot.com/2013/10/2-million-ounces-of-paper-gold-were.html

The blog-o-sphere from Peter Schiff to Zerohedge was ablaze with commentary about the smack-down.

Gold price manipulation reporting has now gone mainstream as non other than CNBC reported on Friday's market action.  CNBC articles quoted traders.  
"There is only one conclusion that seems logical regarding Friday's gold trade and the one from a month ago, and that's that they were designed to manipulate prices," http://www.cnbc.com/id/101110403
"So huge, in fact, that the trade's impact was felt across the commodity market. Silver and platinum were hit at about the same time, and even crude oil appears to have been affected."http://www.cnbc.com/id/101106134

CNBC reporting does not quite put it all together.  Despite reporting on price manipulation they ignore it when discussing gold price action and forecasts.  For example, here is a CNBC video segment where they rationalize short term gold prices with fundamentals ignoring even the possibility of manipulation.    
If gold can't rally now, when can it?Why can't gold rally? D.C. concerns do not help gold, as it shrugs off the Yellen nomination. Gold's next move, with CNBC's Jackie DeAngelis and the Futures Now Traders.  http://www.cnbc.com/id/101106134
Gold will rally when futures contract holders demand delivery of physical gold in excess of what the COMEX can deliver.  The COMEX will be forced to cash settle revealing the dearth of physical supply.  When the COMEX cupboards are shown to be bare gold investors in GLD will doubt that GLD has physical because GLD's authorized participants are the same banks that run the COMEX.  This doubt will create a run on GLD.  

The run on GLD many have already started.  According to hedge fund manager William Kaye in a King World News interview ". . . when it comes to the ETF GLD, you need about $13 million worth, or 100,000 shares, if you want to redeem the shares for physical gold.  We have a number of our sources who have told us directly that JP Morgan and some of the other bullion banks are in fact turning down investors with 100,000 shares who have asked to redeem those shares for physical gold." http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/10/15_The_West_Is_Now_In_The_Process_Of_Destroying_Itself.html

Sunday, October 13, 2013

2 million ounces of paper gold were dumped on the COMEX in 4 minutes last Friday morning driving the price down $30.

2 million ounces is about 62 tons.  The COMEX currently has only 22 tons of registered gold in its warehouses that is available to settle futures contracts, which are often referred to as paper gold.  Total gold in COMEX inventory is 215 tons which includes eligible gold, which is owned by the banks' customers.  Eligible bullion is in the proper form to be registered if the owner decides to reclassify it as registered.  The owners could also decide to move their bullion out of COMEX warehouses.

This sudden, large sale of paper gold triggered 'stop loss logic' that halted trading for 20 seconds.  The COMEX has circuit breakers that temporarily halt trading if it becomes too volatile.  20 seconds is a long time is today computer algorithm driven markets.

As discussed in previous posts, large sudden sales are a sure sign of market manipulation because no rational seller would depress prices while unloading their investment.  A rational seller would sell their position over time, which in this high volume market could be just several hours.

Price suppression like this presents buying opportunities.  But, it will take a while for gold bulls to lose their fear of future price smack-downs in their quest to time a market bottom.  Once gold starts to appreciate, it will really take off.  The fear being left behind will overcome the fear of another, more favorable buying opportunity.  Gold prices have a long history of sudden, dramatic appreciation.  And, gold ownership has never been more leveraged than today.

Monday, October 7, 2013

COMEX Gold has 48 Owners per Ounce, Jesse

Analysis of open interest and warehouse inventory on the COMEX for gold and silver: http://jessescrossroadscafe.blogspot.com/2013/10/owners-per-ounce-of-silver-and-gold-at.html

Each ounce of registered silver in COMEX inventory has 13 owners.
Each ounce of registered gold in COMEX inventory has 48 owners.

The COMEX has entered contracts with various buyer and sellers of gold and silver.  In summary these contracts exchange metal at a future date for cash now.  The total of all ounces that are under contract is called 'open interest.'  If all contract holders were to demand physical deliver or settlement when their contract expires, the COMEX would currently need 48 times as much physical gold to avoid a delivery default.  This would be similar to a run on a bank.  Banks do not have all their depositors cash on hand.  And, if all depositors insisted on withdrawing their cash at the same time the bank would be caught short.

As you can see from the charts in Jesse's post, historically the COMEX has kept only a fraction of physical metal in inventory to support multiples of contracts.  Currently gold's ratio of 48 is extremely high.

Contract holders typically settle for cash because they do not want to store the physical metal and they probably need cash to pay margin debt that they took on to invest in COMEX contracts in the first place.  With 48 owners per ounce, if more than 2.1% of contract holders stand for physical delivery the COMEX will delivery default.

In a delivery default the COMEX can force the contract holder to accept cash for settlement.   It is not clear what price per ounce would be used to cash settle.  http://rikgreeninvestorforum.blogspot.com/2013/10/comex-contracts-allow-for-forced-cash.html   A delivery default would likely send the price of physical gold sky-rocketing.  I suspect that the COMEX would cash settle at a pre-lift-off price.

Central Banks Buying Gold now while Prices are Low

OK, maybe Ben himself does not understand gold prices day to day.  He is not hands-on with the bullion banks' manipulation of the gold and silver markets.  The banks are implementing his strategy.  He does not know how.  Clearly, he and other central bankers are acquiring gold because they find it under valued long term.
Ben S. Bernanke, the world’s most-powerful central banker, says he doesn’t understand gold prices. If his peers had paid attention, they might have stopped expanding reserves that lost $545 billion in value since bullion peaked in 2011.
Central banks, which own 18 percent of all the gold ever mined, will add as much as 350 tons valued at about $15 billion this year, the London-based World Gold Council estimates. They purchased 535 tons in 2012, the most since 1964.http://www.bloomberg.com/news/2013-10-06/gold-befuddles-bernanke-as-central-banks-losses-at-545-billion.html

Fraud at Commodity Exchanges - International Edition

Fraud seems to be standard operating procedure at commodity exchanges around the world.  First let's go to England where the London Metal Exchange (LME) is "under fire"
"Without doubt, the main focus of most market participants will be the London Metal Exchange’s review of its under-fire warehousing system. . . . . Together with several warehouse owners, the exchange is at the sharp end of regulatory scrutiny and legal action for long wait times to deliver physical metal."http://www.ft.com/intl/cms/s/0/33684eb0-2ec5-11e3-be22-00144feab7de.html#axzz2h390mI7r
Moving on to India.  The National Spot Exchange Limited (NSEL) is under investigation by the Economic Offences Wing (EOW) of the Mumbai Police

". . . it emerged that clients of the brokers had been allowed to take out unregulated longer-term forward contracts, rather than spot contracts in commodities such as sugar and wheat, the type of physical trade that the bourse was established to handle. As a result, questions arose over whether there was actual delivery of the commodities that were being traded."  http://www.ft.com/intl/cms/s/0/e2b9ef74-08c1-11e3-ad07-00144feabdc0.html#axzz2h390mI7r
 "Sinha, who is leading the EOW probe, admitted that in scale this was the largest he had handled so far. He added his prime objective was monetisation of the assets and tracing the money trail. But, he declined to dwell on the progress the probe had made on these fronts. The investigations so far by the Mumbai EoW have led them to offices and warehouses in 52 cities across 16 states and were conducted by 210 officers and 260 men."  http://economictimes.indiatimes.com/markets/stocks/market-news/some-nsel-brokers-may-face-criminal-charges-says-economic-offence-wing/articleshow/23617510.cms

"During the raids, it has emerged that 30 of the about 60 warehouses our teams raided were found to be empty. This indicates that certain traders allegedly connived with the NSEL officials and did not deposit physical stocks in the warehouses for money they received from the investors," the official told PTI.
"Another shocking thing is that four warehouses did not even exist, though they appear on documents seized from the NSEL and others," the official added.http://economictimes.indiatimes.com/markets/stocks/market-news/Economic-Offences-Wing-finds-half-of-NSEL-warehouses-empty/articleshow/23533792.cms
Gold and silver bullion e-series contracts caught up in NSEL investigation:
"MUMBAI: Bombay High Court today said it would pass order on October 7 on whether the settlement of e-series bullion contracts at the troubled National Spot Exchange Ltd (NSEL) should be aggregated with that of the paired contracts being overseen by the Forward Markets Commission."
"NSEL counsel said e-series bullion contracts involved 800 kgs of gold and 43 million tonnes of silver, estimated to be worth Rs 525 crores."
43 million tonnes of silver must be a miss print.  For comparison, silver open interest on the COMEX is about 18,000 tonnes.  Gold trading is probably minimal give recent severe government restrictions on gold importation.  

In the US, fraud is more sophisticated, as this example exposed by the NT Times shows:
"The Commodity Futures Trading Commission has issued subpoenas to Goldman and owners of other major warehouses as part of its inquiry into irregularities in the aluminum market that are believed to have cost consumers billions of dollars since 2010.""The subpoenas seek all internal documents, e-mails, correspondence, voice recordings and other records concerning the warehouse operations dating back to January 2010, according to two people familiar with the documents. The subpoenas also demand documents and correspondence regarding the London Metals Exchange, a private trade association that regulates warehousing. The subpoenas indicate that the federal inquiry has 30 “areas of interest.”"http://www.nytimes.com/2013/08/13/business/us-subpoenas-goldman-in-inquiry-of-aluminum-warehouses.html
Interestingly, a couple months ago JP Morgan announced that its commodity business is for sale.  The risk of fines must outweigh the profits.  http://online.wsj.com/article/SB10001424127887323608504579022852576701892.html

First Poland, Now Russia Confiscating Private Pension Assets

If Poland can do it, then Russia can too.  Another precedent for government confiscation of private pension assets: 
"Russia’s government is temporarily seizing $7.6 billion in savings from non-state pension funds while it carries out inspections"


Friday, October 4, 2013

COMEX Contracts Allow for Forced Cash Settlement

According to David Morgan in this interview by usawatchdog.com precious metals forward contracts allow for the COMEX to force cash settlement.  Therefore, if the COMEX runs out of physical metal it will not technically default.  The discussion of a potential COMEX default begins at minute 14:30 in this video interview.  

There is no reasons to doubt Morgan's read of COMEX contracts.  I like his attitude, "read the contract."  I would like to.  Can anyone refer me to a copy of COMEX precious metals contracts?

This raises the big question of why anyone would use the COMEX to trade in precious metals if there are situations where you could be stuck with fiat currency instead of bullion.  The current price of paper gold must be discounted for this risk.  Amazingly one can still purchase physical from coin dealers for example for near paper gold prices.  The discount can be this small only because every COMEX trader thinks they will be able to get out before there's a run on the vault.

Run you fools . . .