GLD Inventory of Gold Drops Below 800 Tonnes, a five year low, when Gold was less than $1,000/ounce

I finally found some time to look at GLD and SLV exchange traded plans (ETP) inventory and price history.

Gold inventory at GLD fell to just below 800 tonnes in the last days of December 2013.  The last time GLD has 800 or fewer tonnes of gold was in December 2008 when the price of gold was $780 per ounce.  In 2008, the gold bull market was strengthening which eventually pushed prices over $1,800.  2013 is the reverse.  Gold buyers are so bearish that they wish to own only 800 tonnes even with the price at $1,200.

Remember only Authorized Participants (AP) in GLD, such as HSBC, Goldman, JP Morgan, Scotia, Deutsche, Citi, and UBS are allowed to create or redeem baskets of 100,000 GLD shares in exchange for bullion.  The Trust is responsible to manage inventory so that the price of GLD shares tracks that of gold.

Interestingly, silver inventory at the SLV Trust has remained flat while price dropped during the last year.  It seems that silver bears are not as pessimistics as gold bears.  There are many other possible causes of the disparate behavior of GLD and SLV inventory.  What's your theory?

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.  

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.  

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.

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.

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

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.

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.
http://www.zerohedge.com/news/2013-11-25/gold-hammering-leads-another-overnight-gold-market-halt

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.
http://www.cmegroup.com/trading/metals/precious/gold_quotes_volume_voi.html