03 September 2015

Gold 'Claims Per Ounce' Spikes Back Up to 126:1

The 'claims per ounce of gold' deliverable at current prices has spiked higher once again, to 126:1.

As soon as the 'active month' of August was over at The Bucket Shop, JPM took a chunk of gold back off the registered for delivery roster.   In the silver market JPM is gaining the reputation for a large physical silver hoard, and the role of a 'fireman' to maintain the stability of leverage in supply and demand.

These spikes higher in the ratio of open interest to deliverable bullion at current prices is not something that has happened in the past fifteen years at least.   And neither has the steady increase in the ratio which we have been seeing in the past couple of years.  This is shown in the last chart.

The Financial Times has finally noticed that the price for 'borrowed' gold bullion that is taken to Switzerland for re-refining and then final shipment to Asia for purchase and withdrawal is rising.

These are signs that one might expect to see in a late stage gold pool in which the manipulation of a market has gone too far for too long.   One thing you can say about the financial speculators is that they never know when to quit.   Remember the London Whale?   He never stopped until the rest of the professional participants raised a fuss that he was disrupting the entire market!

The clever quislings for the bullion banks will note that an actual default on the Comex is unlikely, and they are right.  It is not really a 'physical delivery' exchange, but is now primarily a betting shop.  There is plenty of gold in the warehouses, if you do not concern yourself with the niceties of property rights.  And claims can be force settled in cash on a declaration of force majeure.  

Heck, as we saw in the case of MFGlobal,  when JPM shoved to the front of the assets allocation line, even receipts for actual physical gold owned outright can be forced settled in cash.   If you hold gold in a registered warehouse or an unallocated account,  then your ownership is philosophically 'conceptual.'

The physical delivery exchanges are in other places, like the LBMA in London and especially the markets of Asia such as the Shanghai Gold Exchange.

And this is where we will see the first signs of a breakdown in the gold price manipulation pool of the bullion banks, first as signs of 'tightness' in the delivery of metals, and then in the initial 'fails to deliver.'

Rising prices will provide relief.  But the pool operators are not shy about pressing and doubling down, in a familiar pattern of overreach.  Remember the eventual demise of 'the London Whale?'

And although it is hard to believe, perhaps rising prices may not be so easily allowed.
"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake.   

Therefore at any price, at any cost, the central banks had to quell the gold price, manage it." 

Sir Eddie George, Bank of England, September 1999

And it might not surprise anyone if it turns out that the wiseguy bullion banks are operating under the 'cover' of some bureaucratic boobs and a policy exercise gone horribly wrong.  It would be like giving a platinum credit card to a gambling addict.  Except you do not think that you ever have to pay the bills when they come due, since you are playing with other people's money.

"I have one other issue I'd like to throw on the table. I hesitate to do it, but let me tell you some of the issues that are involved here. If we are dealing with psychology, then the thermometers one uses to measure it have an effect. I was raising the question on the side with Governor Mullins of what would happen if the Treasury sold a little gold in this market.  (just a little)

There's an interesting question here because if the gold price broke [lower] in that context, the thermometer would not be just a measuring tool. It would basically affect the underlying psychology.

Now, we don't have the 'legal' right to sell gold but I'm just frankly curious about what people's views are on situations of this nature because something unusual is involved in policy here. We're not just going through the standard policy where the money supply is expanding, the economy is expanding, and the Fed tightens. This is a wholly different thing."

Alan Greenspan, Federal Reserve Minutes from May 18, 1993

Just a little 'perception management' gone horribly wrong, right?   And no one could have seen it coming.

02 September 2015

Financial Media Wakes Up to 'Physical Tightness' In London Gold Bullion Market

How interesting that the Financial Times has finally noticed 'tentative signs of increased demand for bullion from consumers in emerging markets.'  You know, those obscure places with difficult names such as I-N-D-I-A and C-H-I-N-A.

It's not all that new of a phenomenon, mates.   Our friend Nick has been tracking it, and we have been talking about that here at Le Cafe, for a couple years now.  Well, maybe almost a decade.  See the charts below.

And we have also been hearing about 'physical tightness in the market for gold for immediate delivery.'  While the 'cost of borrowing gold has risen sharply in recent weeks.'

Even while the price of gold was shoved lower on the non-delivery paper markets of The Bucket Shop, helping to crater the deveopment and production of mining companies.

Sounds like borrowing gold for physical delivery is starting to be a dodgy business, a little hard to manage at such high leverage of claims to items.

Wait until people start realizing that there is a diminishing mix of deliverable and of 'borrowed gold' backing up a pyramid of derivatives and paper claims.   Is that the sound of a spoon scraping the bottom of the pot yet?

What happened to the theory of higher prices to relieve demand in excess of supply?

And where is that 'borrowed gold' coming from, by the by?  It must belong to someone, and they may even think it is safely tucked away while it is on its way to Asia via Switzerland.

If the LBMA has been doing what some think they have been doing with demand and available supply, then we haven't seen anything yet.

Never be the last one out of the pool.

But let's see how all this plays out.

Gold Demand from China and India Picks Up
By Henry Sanderson
Financial Times, London
Wednesday, September 2, 2015

London's gold market is showing tentative signs of increased demand for bullion from consumers in emerging markets, after the price of the precious metal fell to its lowest level in five years in July.

The cost of borrowing physical gold in London has risen sharply in recent weeks. That has been driven by dealers needing gold to deliver to refineries in Switzerland before it is melted down and sent to places such as India, according to market participants.

The rise "does indicate there is physical tightness in the market for gold for immediate delivery," said Jon Butler, analyst at Mitsubishi. ...

... For the remainder of the report:

Gold Daily and Silver Weekly Charts - Silver Stronger as Gold Capped

Gold was hit early and then held lower most of the day in NY trade after some strength overnight.

You might make a rubber stamp out of that sentence and it would serve as the daily commentary for most occasions.

Silver showed a little more life, but still remains quite undervalued relative to gold.

The action in the warehouses yesterday was a bit telling, especially if you look at JP Morgan. They withdrew quite a chunk of the gold which had been up for delivery during the active month.  The current amount of 'deliverable' gold at these prices is back down to 324,677 troy ounces, or about 11 tonnes.

I think the hypothesis that suggests that JPM is a key member of the existing Gold Pool, and perhaps with a hand in silver as well, is not a bad one to keep in mind.   They are certainly the major source of silver bullion at The Bucket Shop, and the seeming captain of the gold supply to facilitate delivery at lower than market clearing prices as needed.

But time alone will tell.

Have a pleasant evening.

SP 500 and NDX Futures Daily Charts - Rebound On Weak Economic News

US equities caught a rebound today largely on selling exhaustion and weaker than expected ADP employment and economic news in general.

The preoccupation with the Fed interest raise of 25 basis points is almost getting silly. It is largely symbolic, and will have little to no effect on the economy.

It does distract from the real problems of an outsized financial sector, a rapacious one percent that is exerting undue influence on political and fiscal policy, and of course, stagnant wages and underemployment fostering a continuing weakness in aggregate demand.

I do not expect these problems to be address now until there are a major series of events that cause the political leadership to confront reality and take a break from their quest for personal riches beyond their reckoning.

Have a pleasant evening.

The Order of the Star Spangled Banner or The Know Nothings

"The Know-Nothing party was a U.S. political party that flourished in the 1850s. The Know-Nothing party was an outgrowth of the strong anti-immigrant and especially anti-Roman Catholic sentiment that started to manifest itself during the 1840s. A rising tide of immigrants, primarily Germans in the Midwest and Irish in the East, seemed to pose a threat to the economic and political security of native-born Protestant Americans.

In 1849 the secret Order of the Star-Spangled Banner formed in New York City, and soon after lodges formed in nearly every other major American city.

Members, when asked about their nativist organizations, were supposed to reply that they knew nothing, hence the name. As its membership and importance grew in the 1850s, the group slowly shed its clandestine character and took the official name American Party. As a national political entity, it called for restrictions on immigration, the exclusion of the foreign-born from voting or holding public office in the United States, and for a 21-year residency requirement for citizenship.

By 1852 the Know-Nothing party was achieving phenomenal growth. It did very well that year in state and local elections, and with passage of the Kansas-Nebraska Act in 1854 it won additional adherents from the ranks of conservatives who could support neither the proslavery Democrats nor antislavery Republicans. When Congress assembled on Dec. 3, 1855, 43 representatives were avowed members of the Know-Nothing party.

That, however, was the peak of Know-Nothing power. At the American Party convention in Philadelphia the following year, the party split along sectional lines over the pro-slavery platform pushed through by Southern delegates."

Britannica, Know Nothing Party

"I am not a Know-Nothing. That is certain. How could I be? How can any one who abhors the oppression of negroes, be in favor of degrading classes of white people? Our progress in degeneracy appears to me to be pretty rapid. As a nation, we begin by declaring that 'all men are created equal.' We now practically read it 'all men are created equal, except negroes.'

When the Know-Nothings get control, it will read 'all men are created equal, except negroes, and foreigners, and catholics.' When it comes to this I should prefer emigrating to some country where they make no pretence of loving liberty- to Russia, for instance, where despotism can be taken pure, and without the base alloy of hypocrisy."

Abraham Lincoln, Letter to Joshua Speed, August 24, 1855

The Know Nothing Party enjoyed a localized resurgence in the post Civil War period as the Ku Klux Klan, which held a deep prejudice against Black, Catholic, and Jewish Americans and 'foreigners'.  It favored the use of violence and terror.  The first Klan was a purely Southern phenomenon that died out around 1870.

The resurgence of the Klan was prompted by D. W. Griffith's glamorized portrayal of the Klan in 1915's Birth of a Nation.  The 1920's was its period of greatest and most widespread power.  It gradually declined in the Second World War.
"The second Klan grew primarily in response to issues of declining morality as typified by divorce, adultery, defiance of prohibition, and criminal gangs In the news every day. Secondly, it was a response to the growing power of Catholics and American Jews with non-Protestant cultural values.  [prejudice against Black Americans and foreigners is always assumed in these movements.]

By the mid 1920s the second Klan had a nationwide reach, with its densest per capita membership in Indiana. The Klan became most prominent in cities with high growth rates between 1910 and 1930, as rural Protestants flocked to jobs in Detroit, and Dayton in the Midwest; and Atlanta, Dallas, Memphis, and Houston in the South. In Michigan, close to half of the state's 80,000 Klansmen lived in Detroit."

The nativist movements are just another nearly forgotten chapter of American history that seem to recur whenever change and turmoil arises.