Tag Archives: Comex

Bullion Shortages Will Push Junior Mining Stocks Higher in 2020

The chart above shows the ratio of GDXJ/GDX. Although I don’t consider GDXJ to be a junior ETF per se, the GDXJ index does contain smaller cap, later-stage juniors and smaller cap producers. In that sense, it offers slightly higher risk/returns than GDX. That ratio has popped above the downtrend line that was established at the peak of the last bull cycle in the sector.  Prospectively, as long as it stays above that trendline and moves higher, it’s a great indicator that the precious metals sector will stage a big move higher for the next couple of years.

Trevor Hall and I discuss the physical bullion shortage developing in London and New York and why the precious metals sector will likely make a big move in 2020 – click on the graphic below or this link to listen:

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I cover several junior exploration stocks with upside that is several multiples of their current price. I also specialize in looking for value plays in larger cap producing miners as well as reviewing stocks to avoid.  You can learn more about this mining stock newsletter here:   Mining Stock Journal information.

NOTE: I do not receive compensation from any mining stock companies and I do not accept any precious metals industry sponsors. My research and my views are my own and I invest my own money in many of the stocks I present.

Time To Buy Gold And Silver On Every Pullback

The soaring paper gold open interest on the Comex is just one indication of a shortages developing in the physical gold bullion market. It’s no coincidence that just prior and accompanying the sell-off in gold this week that Exchange for “Physical” and Privately Negotiated Transactions (EFPs and PNT) volume spiked up on the Comex. EFPs and PNTs are “derviative” transactions which enable the bullion banks to settle futures with cash or some other form of gold derivatives like shares of GLD.

There are other indications as well, which Chris Marcus and I discuss this week on his Arcadia Economics podcast:

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I recently found another “golden nugget” large mining stock contrarian play the December 12th issue of my Mining Stock Journal. This stock should be an easy double over the next 6-12 months.  You can learn more about this mining stock newsletter here:   Mining Stock Journal information.

The Comex Is A Complete Joke

Comex gold contracts were brought to life in 1974. Correspondence between senior officials in, and advisors to, the Nixon Administration discussed the need to create an “investment” vehicle to “capture” institutional investment money directed into gold in order to prevent the rapid rise in gold after Nixon closed the gold window. If you are curious, the letters are posted in the GATA archive (GATA.org).  For instance:  LINK.

Since the introduction of paper gold, the Comex – gold and silver trading – has evolved into what can only be described as a caricature of a “market.” The open interest in gold contracts is nearly 10x the amount of physical gold reportedly held in Comex vaults; it’s 60x the amount of “registered” gold, or the gold designated as available for delivery.

Total open interest on the Comex as of last Thursday is 787k contracts representing 2,459 tons of paper gold.  Global annual physical gold production is around 2,700 tons.  The net short position of the Commercial trader category per the current COT report – “commercials” are primarily the banks which make markets on the Comex – is 134k contracts, or 418 tons of paper gold.

That the open interest in paper gold contracts is nearly equivalent to  the amount of actual gold produced yearly by gold mines is an absolute joke. The purpose of the Comex, period, is to give the western Central Banks – primarily the Fed – the ability to control the price of gold.  Based on the preliminary o/i report for Friday, the paper gold interest has spiked up to approximately 800,000 contracts.

But the good news is that rapid escalation of open interest in paper gold on the Comex is evidence that the banks are losing their ability to keep a lid on the rising gold price.  Bill Powers invited me onto this Mining Stock Education podcast to discuss this issue, my outlook for the price of gold in 2020 plus some of my favorite mining stocks:

A few of the stocks I follow, recommend in my Mining Stock Journal and invest in myself have doubled or more since the May 2019. Several more are poised for big gains in 2020. You can learn more about  Investment Research Dynamics newsletters by following these links ( a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   Mining Stock Journal subscription information

NOTE:   I do not receive compensation from any mining stock companies and I do not accept any precious metals industry sponsors.  My research and my views are my own and I invest my own money in many of the stocks I present.

Money Printing And Physical Demand Will Drive Gold Higher

I’m growing more confident that we’re on the cusp of a big move higher in the precious metals sector because of the Fed’s massive money printing. Also, because the money printing and near zero interest rates are visibly not stimulating economic growth, we’re at the point at which unless the Fed continues increasing the amount of money it puts into the system, the melt-up in the stock market is completely unsustainable.

This is very similar to late 1999/early 2000 when Alan Greenspan tried to reverse his Fed’s massive money printing operation ahead of that notorious boogieman, the Y2k Bug. Not only did the tech stocks collapse then, but also the precious metals sector transitioned from the end of a 19 year bear market into the current secular bull market.

From what I’m hearing – and something that’s been referenced by Alasdair Macleod and Egon von Greyerz – a shortage of physically deliverable gold is developing in London. The action this past week fits the information. Given the size of the derivative short position (futures, LBMA forwards, leased gold, OTC derivatives, hypothecated gold) in London and New York, if obligated counterparties begin to default on delivery demands, the precious metals sector could become explosive next year.

The paper gold open interest continues to hit new all-time highs almost on a daily basis. The current open interest is 765.5k contracts. That’s 76 million ozs of paper gold. The quantity is a little less than double the average open interest on the Comex over the last 10 years.  The amount of open interest has nearly doubled since the end of 2018,  with record o/i levels almost every day since October 29th.

Never in the recent history (last 20 years) has the Comex  sustained this many open interest hit  record highs without being followed by a significant price take-down.  Hidden factors seem to preventing this as evidenced by the inability of the Comex banks to implement a run-of-the-mill open interest liquidation price attack operation. These used to be good for over $100 of downside in a short period.

The Comex gold vaults reportedly hold 8.6 million ozs of gold. That figure has remained fairly constant with perhaps 10% variability up or down for at least the last 10 years. If just 10% of the open interest  stands for delivery in any given month, there would be a short squeeze of Biblical proportions in the price of gold.

Notwithstanding that, the soaring open interest in paper gold in relation to the amount of underlying physical gold on the Comex is evidence of the degree of effort required for the banks to at least regulate the rate at which the gold price is rising.

Circling back to rumors of a growing shortage of physical gold in London – see this analysis for instance:  GATA – it’s interesting to note that every attempt to push down the price of gold when the LBMA and Comex trading floors are open is quickly repudiated.

But there are other signs.  I don’t monitor the LBMA a.m./p.m. fix on a daily basis, but I’m apprised of it when there’s unusual activity.  It required 19 iterations for Friday’s p.m. price fix operation to balance out heavy bidding with enough offerings.  The price of gold rose  from the start to the finish.  I have never observed even close to this many iterations needed to establish a price-fix in either the a.m. or p.m. sessions.   Some entity wanted to buy a lot physical gold on Friday afternoon and it took time and effort to find enough offerings to fill the bids.

Of course, smart money has been quietly accumulating large positions in the speculative micro-cap junior exploration stocks for the last three years via private placements or direct investments in many of these companies.  As well, there’s been a rise in gold and silver mining company M&A.

Just like in the early 2000’s, October 2008 and December 2015, we will wake up one day to the start of  a long streak of incessant daily gold and silver price moves higher in the overnight market. Those who are not positioned ahead of this will find themselves running for the train as the doors close and it pulls out of the station.

Part of the above commentary is an excerpt from the latest issue the Mining Stock Journal. You can learn more about this newsletters, which focuses on speculative junior exploration stocks as well as find in value in producing miners, here:   Mining Stock Journal info

 

 

Gold May Be On The Cusp Of A Big Upward Price Reset

Precious metals investors may be getting an unexpected Christmas present this year, beginning with the sudden $25 jump in gold on Tuesday and Wednesday. From what I’m hearing, a shortage of physically deliverable gold is developing in London. In fact, Alasdair Macleod and Egon von Greyerz have both alluded to this development.

The action this past week fits the information. Given the size of the derivative short position (futures, LBMA forwards, leased gold, OTC derivatives, hypothecated gold) in London and New York, if obligated counterparties begin to default on delivery demands, the precious metals sector could become explosive next year.

The ability to suppress the price of gold has become problematic for the western bullion banks as evidenced by all-time high open interest in Comex gold, especially relative to the amount of gold reportedly held by Comex vaults. As of Monday, the open interest was 734k contracts representing 73.4 million ozs of paper gold. This is 8.4x more than the total amount of gold reported to be in Comex vaults as of Tuesday and 58.5x more than the amount “registered” gold, which is gold that is designated as available for delivery.

In the last few years the open interest has averaged around 450k (ballpark) contracts. When the price of gold ran toward $1900 in 2011, the highest weekly open interest was 542k the week of July 17, 2011. The last time gold was trading around the $1500 level, which was March 2013, the open interest was in the 420k area. The point here is that an increasing amount of paper gold is required in order for the banks to contain the rate at which the price of gold discovers price discovery.

More significant, every aggressive attempt this year by the bullion banks to push the gold price lower has been countered with a swift rally: “For months the usual central bank-inspired smashes in the gold futures markets have not been having much effect, even as GATA consultant Robert Lambourne has reported increasing intervention in the market by the Bank for International Settlements” – Chris Powell, GATA.

The quote just above is from a must-read essay by GATA’s Chris Powell in which he lays out the case supporting the view that the New York and London gold markets are getting squeezed:

“The Comex has just quickly authorized a vast expansion in what bullion banks can use as collateral for their selling — ‘pledged gold’ held off the exchange, supposedly in London, for whose existence and unimpairment there is no public evidence.

Amid these indications of shortages, the open interest in gold futures on the Comex keeps hitting record highs. The bullion banks selling the contracts seem to be acting as if the gold supply itself is infinite, not just the supply of gold paper.”

I highly recommend reading the rest of Chris Powell’s article:  The signs swirl all around us, so is the reset at hand?   If the theory, which is supported by evidence, of a developing shortage of physical gold on the Comex and the LBMA is correct, the prices of both gold and silver could become explosive in 2020.

The Path Of Least Resistance For Gold Is Up

The price of gold has held firm at the $1460 (front-month contract basis, not the Kitco “spot” price) level despite the constant price attacks that have been occurring overnight and into the Comex floor trading hours since early November.

On an intra-day basis gold has managed to hold continuous aggressive attempts to push the price below $1460 for the last 6 trading days, including today.  Interestingly, last Tuesday (November 26) and Friday, gold shot up during the Comex floor trading hours in the absence of any news or event triggers.

Zerohedge attributed Tuesday’s spike in gold to the jump offshore yuan vs the dollar. But that day gold started moving before the yuan moved.  On Friday, gold soared as much as $14 from an intra-day low of $1459 while offshore yuan declined vs the dollar.  Zerohedge’s explanation for the mysterious movement in the gold price on two days thus lacks evidence.

The open interest in the December Comex contract remained stubbornly high through first notice day last Friday. The banks, which have an extreme net short position in Comex gold have exerted an enormous effort to force hedge funds either to liquidate long positions or to sell December contracts and move out to February, which is the next “front month” contract.

If an unusually large number of longs decide to stand for delivery, it would place an enormous amount of stress on the warehouse stock of gold that has been designated as available for delivery in Comex vaults. In addition India has been importing an enormous amount of gold starting in late October. This has provided strong price support from the physical market.

Also, the gold price has withstood a 43,000 contract liquidation in Comex open interest, including a 1-day record 127k contract liquidation in the December contract, much of which “rolled” out to February.  Historically a draw down in Comex open interest of this magnitude would have removed at least $50 from the gold price.

In the chart above, gold appears to be establishing a strong base in the $1460 area. The MACD shows an extremely oversold technical condition as does the RSI.  With the Central Banks, including the Fed, printing money at a furious pace right now, the conditions are in place for potentially a big move in gold.

The commentary above is a partial excerpt from my lastest issue of the Mining Stock Journal. In this issue I present an opinion on the Kirkland Lake acquisition of Detour Gold that may surprise some mining stock investors. The junior exploration stocks have been relentlessly pounded lower during this latest sell-off in the sector, especially relative to the shares of the mid-cap and large-cap producing miners. I believe several junior exploration stocks are trading at a price level which significantly reduces the risk and increases the potential ROR in these shares.

The Mining Stock Journal  covers several mining stocks that I believe are extraordinarily undervalued relative to their upside potential. I also present opportunistic recommendations on select mid-tier and large-cap miners that should outperform their peers.  You can learn more about this newsletter here:   Mining Stock Journal information.

Gold May Be Set Up For A Pleasant Holiday Season Rally

In what has become a recent routinized pattern in the price of gold (and silver), the market rallies during peak Indian gold market hours and then sells off when London opens. After the customary price take-down when the Comex floor trading opens, gold and (and silver) typically recoup the overnight sell-off. In short, there seems to be epic price discovery battle going on between paper derivative gold and the physical gold market and that won’t take much to ignite a massive move higher.

The recent sell-off in gold has triggered massive gold demand from India. Recall that India had been dormant since June, when the Government increased the import duty by 25% on imported kilo bars. But the lower price of world gold, combined with India’s peak seasonal gold buying period has unleashed India’s gold importation beast.

Based on premiums being paid for gold after taking into account the import duty, Indian importation is running full-tilt.

Despite repeated attempts to take the price of gold lower, Indian physical demand has put a floor under the market, at least for now, and poses a potential threat to the record level of net short interest in Comex futures by the banks and hedgers…The rest of my commentary came be found at  Gold-Eagle.com.

CME Pledged Gold: Did The Comex Rescue HSBC

A couple days after the CME allowed clearing members to use warehouse warrants as collateral for the mandatory performance bond, the new form of collateral was implemented by HSBC.

With help from Craig Hemke (TF Metals Report) it appears as if the Comex activated a low-grade rescue of HSBC.  Chris Powell at GATA believes this “hypothesis fits the decades-long practice of the international gold price suppression scheme of governments, central banks, and bullion banks. That is, to keep metal moving around so fast that it can be applied to pressure points before its real owners notice that it’s missing — to make a single ounce of gold seem to be in as many as a hundred places at once.”

On November 4 authorization for traders on the New York Commodities Exchange to use “London gold” and Comex gold warrants as collateral was tripled, raised from $250 million to $750 million. HSBC now has used $340 million, or 45.3 percent, of its new collateral limit. It seems more than coincidental that HSBC took advantage of the collateral increase so soon after it was put into effect.

I see the rule change as a low-grade bailout of HSBC, analogous to the Fed’s low grade bailout of the big banks with the “repo” “quantitative easing.” The rule change also flags HSBC as the largest trader in the commitment-of-trader category that designates the percentage of the long and short contracts held by the four largest traders on the Comex.

Assuming, as is likely, that HSBC’s short position was largely put on at lower gold prices, the bank is probably getting hammered with a mark-to-market loss.

Here is the issue that needs to be answered but likely never will be: Do any of the warrants HSBC has pledged as collateral involve gold not owned by HSBC?

In my opinion, probably all the gold in these warrants is not really owned by the bank.

Most likely HSBC is using for collateral purpose gold that does not belong to the bank — customer gold. That is outright hypothecation.

I wonder if the agreement signed by the vault operators allows them to hypothecate gold held in the vault and not owned by the bank.

Now here’s where it gets even more interesting. Assume HSBC is short those warrants pledged as performance bond collateral and the price of gold moves a lot higher. Then HSBC is getting killed technically being short gold collateral it has pledged for its own liability but doesn’t own. How does the bank remedy this?

It uses an exchange-for-phyiscal or privately negotiated transaction using “London gold.” Since HSBC is the vault operator for the major gold exchange-traded fund GLD, this London gold EFP/PNT would likely use GLD vault gold that may or may not have been hypothecated.

HSBC is likely getting financially squeezed to a major extent on its Comex futures short position and the CME bailed it out by changing the collateral and performance bond margin rules.

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Did the Comex Just Create More ‘Paper Gold’ For Price Suppression?

A mysterious “pledged gold” entry has just showed up on the Comex gold warehouse report. The definition of this new warehouse stock classification for gold is provided in Chapter 7 of the New York Mercantile Exchange rulebook.

In brief, “eligible” gold is a gold bar stored in a Comex vault that meets Comex specifications (quality, size, purity, and brand).

A “registered” gold bar is one that has been designated for delivery and for which a warrant has been issued. This warrant is evidence of and specifies ownership title to the bar. Warrants facilitate the transfer of delivery under a Comex contract.

“Pledged gold” is a bar for which a warrant has been issued but for which the warrant has been placed on deposit at the CME Clearing House as part of a required performance bond.

The Chicago Mercantile Exchange (CME) has its own clearing division through which all trades are confirmed, matched (counterparties being verified), and settled (money changes hands). Each contract has a long and short counterparty.

A clearing member of the exchange is typically a bank, hedge fund, or commercial entity that has been admitted as a clearing member. The clearing mechanism is the “lubricant” that enables any securities exchange to function.

Part of a clearing member’s responsibility is to assume “full financial and performance responsibility for all transactions executed through them and cleared by the CME.” If you execute a trade on the Comex and fail to pay, the firm that took the other side of your trade is on the hook if you don’t pay for the trade. Or if you have elected to take delivery of a gold bar but can’t pay for it, the Comex member that has the other side of your contract is on the hook for the money.

Each clearing member is required to post a performance bond, a specified minimum amount of funds or collateral value that functions as a reserve to reinforce a clearing member’s obligation to guarantee the trades the clearing member executes. Think of this as a margin requirement.

A warrant that has been issued, which signifies titled interest in a gold bar, can now be used as collateral for the performance bond requirement. A warrant used this way is the “pledged gold” in the warehouse report. The gold bars connected to a warrant being used as collateral cannot be used to satisfy contract delivery requirements of the entity using the warrant as collateral. But the gold connected to warrants is still counted as part of the Comex gold stock.

Additionally, Comex clearing members can use what is called “London gold” as performance bond collateral. The CME rulebook does not define “London gold.” Presumably these are the standard 400-ounce London Bullion Market Association bars stored in a London vault.

But the term “London gold” remains unexplained and nebulous, and recently the CME tripled the amount of “London gold” that can be used by a clearing member as performance bond collateral, increasing it to $750 million from $250 million.

Why has the exchange tripled the amount of “London gold” that can be submitted as performance bond collateral and included Comex gold bar warrants as assets considered acceptable collateral?

As has been well documented, the open interest in Comex gold contracts has just reached a record high. The current open interest, more than 716,000 contracts, is 85 times greater than the “registered” gold stock on the exchange and almost nine times more than the total amount of gold in Comex vaults, including “pledged gold.”

As a technical matter “pledged gold” should not be considered part of warehouse stock because it cannot be delivered. The financial risk assumed by the Comex CME clearing members escalates with each new contract of open interest, especially to the extent that the open interest is “uncovered,” meaning the Comex lacks enough gold to bear the risk of a delivery default.

For this reason the size of the performance bond posted by each clearing member increases pro-ratably with the rising value of the gold contract open interest. (That is, clearing members that process an increased amount of contracts require higher margin deposits.)

This raises the question of the quality of “London gold” as collateral. The issue with “London gold” is whether the gold is verifiably sitting in a London vault or if the posting bank — for example, HSBC — even has legal title to the bar.

Hypothecation is when a bank borrows a gold bar held in its custody for a client, a bar owned by someone else, and uses that bar for another purpose like a delivery requirement or perhaps for posting it as collateral on the CME.

What process is in place to verify that the bank has the right to use that bar, or to verify that the bar even exists?

Even if the entity posting “London gold” as collateral may have some type of documentation showing rights to the bar in London, that bar may have been borrowed — that is, hypothecated by the London vault custodian and sent to Asia or India to satisfy a delivery requirement.

Keep in mind that the Bank for International Settlements now allows “gold receivables” to be counted as gold in custody. This hypothecated bar may exist only as a receivable entry on the books of the London vault operator.

Finally, there is the question of big bank liquidity. The “repo” and money printing recently undertaken by the Federal Reserve Bank of New York reflect a liquidity squeeze in the banking system. I would prefer to receive cash as collateral against a performance bond if I were in the business of extending credit for trading activities. Anyone with a brokerage account is required to use cash as margin equity. Try using a piece of paper that says you have titled interest in a gold bar.

It’s quite possible that the ongoing squeeze in big bank liquidity has forced the CME to triple the amount of “London gold” said to be available to the exchange and to include Comex gold warrants as acceptable collateral in lieu of requiring cash or Treasury bonds. This is the only way the CME could present the appearance of financial integrity and security with respect to the soaring gold contract open interest — open interest that is created by bullion banks and hedge funds and that bears almost no relation to the underlying stock of physical gold — to help contain the gold price.

The timing of the expansion of the collateral package is curiously correlated directly with the rapid escalation in gold contract open interest and the recent liquidity squeeze in the banking system.

The tripling of the use of “London gold” and the inclusion of warrants as collateral suggest that the CME and its Comex are preparing to allow an even greater expansion in Comex gold open interest to increase the ability of Comex banks to engage in gold price manipulation. Why else would the CME allow the open interest in gold contracts to dwarf the actual physical gold in Comex vaults?

Ultimately, the use of “London gold” and Comex warehouse warrants expands the fractional-reserve gold banking system and further weaponizes “paper gold” in support of the longstanding bullion bank and central bank campaign to suppress the gold price.

Treasury, CFTC Refuse To Answer Gold Market Rigging Inquiry

For anyone who has studied the issue in-depth, there’s no question that Governments and Central Banks interfere in the gold market (and silver).  The motive is undeniable. Removing price discovery from the gold market enables the Central Banks to sustain the illusion that paper fiat currency is real money.

In addition to all of the evidence gathered and presented to the public over the years (see GATA’s article archive back to 2000), why does the Fed and the Treasury go out of their way to avoid public scrutiny of their gold trading and accounting activities?

The Fed spent millions lobbying Congress and feeding former House Rep Barney Frank’s retirement fund in order to prevent Ron Paul’s audit the Fed legislation from ever getting out of Frank’s House  Committee on Financial Services.  This included hiring Enron’s former chief lobbyist, Linda Robinson.  While Congressman Paul wanted an independent audit of the Fed’s entire operations, he specifically was interested in seeing the files on gold trading, leasing and swaps.  To this day, the Fed refuses any outside inspections of its gold vaults. This includes German Government officials who wanted to see the gold the Fed allegedly “safekeeps” on its behalf.  Why?

U.S. Rep Alex  X.  Mooney has taken over efforts to get to the truth from the U.S. Treasury and the CFTC about its activities in the financial and commodities markets, particularly in the gold and silver markets.   Most of Mooney’s questions on two occasions went unanswered.

GATA has compiled an accounting of Mooney’s fact-finding mission and the refusal of the U.S. Government to respond fully:  “Of course the refusal of the Fed, Treasury, and CFTC to answer the congressman’s questions promptly and fully is strong evidence that the U.S. government is deeply and comprehensively involved in market manipulation.”

You can read entire GATA dispatch with supporting documentation here: Congressman keeps pressing Treasury, CFTC about gold market rigging.