Here are three charts that capture the somewhat uniquely dangerous situation in
the gold futures market on the Comex.
The first chart shows all gold in
storage at Comex certified private warehouses. The major bullion banks control
the vast majority of this storage. Among these are JPM, HSBC, Scotia Mocatta.
Storage and delivery services are also provided by Brinks and Manfra, Tordella,
and Brookes, a large NYC coin and bar dealer.
The year long decline in
open interest on the Comex is a phenomenon worth noting. It is marked on the
third chart. Even as gold bullion purchasing is soaring, gold futures interest
in the US is in a secular decline. But even with this decline, the ‘claims’ of
ownership as represented by futures contracts over ALL gold in the warehouses is
a bit high.
Not to say that futures contract owners can have any claim on
gold merely held in storage. But they can try. I include this because some
people consider it to be important. If the price is allowed to rise high
enough, that customer gold might be tempted into the deliverable category and
offered for sale. The key question is ‘how high.’
The better metric to
watch is the number of claims per registered, or deliverable ounces of bullion
on the Comex. This gives us a current ‘temperature reading.’ And that
measure remains near all time highs on my data sources at 52.62 claims per ounce
at these prices. My friend Nick Laird at Sharelynx, who does a wonderful job
of charting and data gathering, prefers to call it ‘owners per ounce.’ But
since a single ounce of gold cannot have 53 owners if the music stops, I prefer
to call them ‘claims’ or virtual ownership.
Every prior deep decline in
registered gold bullion during this bull market has marked an intermediate price
trend change. I do not think this time will be different, all other things
What exacerbates this situation is the absolutely remarkable
drawdown in gold bullion from the ETFs around the world, but most markedly in
GLD. We have not seen anything like this in silver, platinum, or
As you know, I am persuaded that the request from the
Bundesbank for the return of Germany’s gold, and the deferral of this by the Fed
for seven years, set off a chain of overreactions and market maneuvers that in
retrospect will be viewed as foolhardy.
If the price of gold is allowed
to rise to $1650 to $1750 by the end of January, preferably the end of December,
I think the Comex might avert what for them could become a potentially
disastrous situation. And they need to get started on this fairly quickly so
that the rise is gradual and controllable.
If the bullion banks
continue to game the system, and scalp profits with other peoples’ money, my
forecast is for a market break and dislocation in the gold market that will
imperil quite a few smaller trading houses, and shake the global trade to its
foundations. I would not be surprised to see a halt called to the paper and
physical gold trade, a forced cash settlement on futures and derivatives, and a
price adjustment higher, perhaps in multiples of triple digits. Such price
jumps can be unsettling.
And we could see a TBTF bullion bank or two
shaken to their foundations. If the governments overreact in trying to get them
out of their own mess again without loss or reform, then I think it is time to
keep your heads down and watch for big changes. I doubt they could be that
clumsy, but most politicians know less about money than most economists, and
that is pretty bad. And they are certainly as craven and pliable, so it is
I have a couple of other forecasts about changing politics in
the US, which involves major changes in the current two parties. People forget
that the lifeline of the Republicans and the Democrats as they are now is more
current than old in terms of human history. And a major party change with some
splintering and interesting alliances is becoming more probable.
it is just a forecast, it looks like the die will be cast in December. If they
try the annual price hit in early December, they might set off a series of
unfortunate events as the new year unfolds.
I want to compare this to
watching a friend drinking too much, and then grabbing the car keys and hitting
the road. He or she might make it home. But I wouldn’t want to be in the car
with them as the driver because while the chance of an accident might not be
certain, it certainly can be a destructive outcome.
So you might
consider this a sort of warning to be watchful, just based on the market
mechanics. It does not have to happen. But it has been hard to overestimate
the reckless stupidity of unbridled greed.
Again, the most likely
outcome is the infamous muddle through and the kick of the can down the road,
with a rising price in gold as part of an intermediate trend change. But we are
now in a period of high risk, and I don’t yet see the right steps being taken to
avert it. Some of that rests on the shoulders of the CFTC, and quite a bit on
the exchange, the politicians, and the regulators of the banks. They need to
take the keys away from the drunks in their own organizations and in the ones
that they oversee.
I do not want to join the doomsayers, those who troll
for clicks with ever more dire headlines of impending doom. It almost gets to
be like watching the supermarket tabloids.
All of our problems are
soluble, and things are no worse now than they have been many times in the
past. Our parents and grandparents faced much worse, and I personally have seen
harder times by far. But it is getting pretty bad on a secular level, mostly
from self-inflicted wounds and corruption in my own opinion.
I wanted to
state this unequivocally now because I can see another financial crisis brewing,
and a bunch of hand-wavers running around afterwards saying that no one saw it
coming. Just like the last two or three financial crises. Maybe this time they
will act with caution and good sense. I have the impulse to hedge that though,
and certainly not to count on it.
Posted by Jesse