In 35 years of active participation in several diverse aspects of the financial aspects, I’ve never seen a more obvious investment set-up than long gold, silver and mining stocks:
Tag Archives: Comex
Gresham’s Law And The Gold And Silver Squeeze
“Bad money drives out good money.” When Gresham put forth this proposition, sovereigns were diluting gold and silver coins with metals of lesser value yet the diluted coins were given the same value for legal tender purposes as the more pure coins. Gresham observed that the more pure coins were hoarded and the lesser value coins were used for trade.
Sound familiar? Go find pre-1964 dimes, quarters and half-dollars and try to buy them for their legal tender value. Pre-1964 silver coinage contains 90% silver. Post-1964 silver coins are made from nickel and copper. No one who holds pre-1964 coins would use them for their face value. They have disappeared from circulation. The melt-value of the silver in a 1963 quarter currently is $2.60.
The disappearance of gold bars from the LBMA and Comex is Gresham’s Law in action. Though the virus crisis exacerbated the problem, shortages were developing on both trading venues well before anyone heard of “coronavirus.” As an example, Russia dumped its Treasury bond holdings and used the dollars to buy gold for its Central Bank. China, which holds 12x more Treasuries than Russia held, has been slowly converting its dollar reserves into gold for several years.
Chris Marcus of Arcadia Economics and I discuss the current developments on the Comex and LBMA in our latest weekly conversation:
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You can learn more about Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required): Short Seller’s Journal subscription information – Mining Stock Journal subscription information
“Wanted to send through a note of thanks and support.
I felt in my gut that something was amiss with the markets a year or so ago and started reading up on sound money/macro. At that time I had most of my money in UK stocks but wanted a way out and a way into the metals. I needed guidance thus why I signed up to your short seller and mining journals.
Today I am way down on the mining stocks and somewhat down on physical silver and gold. But I have offset 80% or so of those paper losses with paper gains on a raft of put options on indexes and sector ETFs. I had limited options experience prior to these purchases.” – Mike in the UK
The Comex Does Not Trade Gold
Unequivocally, gold does not trade on the Comex. The Comex trades paper gold derivatives. It is a futures and options exchange on which a small amount of 100 oz. gold bars change ownership each contract month. The transfer of title is facilitated by the creation of an electronic record called a “warrant.” But even these “warrants” which assign title to specific bars are derivatives. Presumably gold is “delivered” to the parties who stand for delivery (the “stopper”). But that “delivery” most commonly is the electronic 
transfer of a warrant from the entity short a paper gold contract to the entity who is long the same.
Because the CME and the CFTC do not place a limitation on the number of paper gold contracts – 100 ozs per contract – in relation to the amount of gold reported in Comex vaults – the price discovery function has been largely removed. As an example, as of Wednesday there were 489,955 open contracts representing 48.9mm ozs of gold, or 1531 tons (roughly 50% of the amount of gold annually produced globally). Lucky for the Comex, less than 1% of the open interest in any given month stands for delivery.
At the beginning of the contract “roll” period, there was well in excess of 200,000 April contracts open representing over 20 million ozs of gold. If 50% of these longs decided to stand for delivery because the Comex appears to be only entity with gold deliverable in quantities, not only would the gold determined to be free and clear of encumbrances and conforming to Comex delivery specs – i.e. “registered” gold – be wiped out but the entire Comex gold stock would be wiped out. But there’s just one problem. The “eligible” gold – gold not registered – belongs to someone else who does not want that gold loaned, leased or hypothecated.
If the Comex regulated the open interest such that the amount of open interest was tied to the amount of gold in Comex vaults – since theoretically eligible gold can be registered – the resultant introduction of price discovery would force the price of gold much higher – higher to a level at which the price functions to balance supply and demand – not paper supply/demand in the form of printed contracts – but physical supply/demand based on the amount of gold sitting in Comex vaults as reported by the Comex vault operators. Given that apparently there’s not much gold in London and a massive imbalance between paper gold and physical gold on the Comex, it would likely require a significantly higher gold price to balance the physical gold supply and demand.
Currently a run on Comex gold appears to be starting, notwithstanding the Comex’s attempt to kick this can down the road with the use of Exchange For Physicals (EFPs) and Privately Negotiated Transactions (PNTs). But EFPs/PNTs are nothing more than second order derivatives created to sidestep the delivery of Comex bars. In fact the EFPs were used largely to transfer the settlement liability of a Comex contract to the LBMA.
Physical gold thus in fact does not trade on the Comex. Rather, the Comex is nothing more than a derivatives exchange with a small amount of physical gold relative to the notional value of the derivatives created.
As with the rest of the paper Ponzi schemes created by the banks and Central Banks, the Comex’s derivatives house of cards has always been fated to collapse. Based on all indications plus the signs of desperation emanating from the Comex and the LBMA, the collapse has begun. This will ultimately lead to much higher prices for gold and silver. Note: this situation started to unfold well before the virus crisis.
The Comex And LBMA: Paper Gold On Steroids
I truly thought I had seen all that was possible in the creation of paper gold when the Comex rolled out its “pledged gold” category which enabled technically insolvent banks like HSBC and JP Morgan – the only two Comex banks to have taken advantage of this new gold derivative product – to use paper gold to satisfy the performance bond requirement of CME clearing members.
But now the LBMA and CME operators have rolled yet another paper gold derivative 
productive in the hopes that the two entities can stave off defaulting on futures and forward contractual delivery requirements. The Accumulated Certificates of Exchange (“ACE”) facilitates the “fractional” delivery of a 400 oz gold bar.
There’s just one minor problem with this set-up. According to the Cambridge Dictionary, the word “delivery” is defined as: “the act of taking goods, letters, packages, etc. to people’s houses or places of work.” To me this means if I want delivery of the 100 oz bar of gold for which I contracted, I would like to have the 100 ozs deposited in the location of my choice so that I can possess the gold bar for which I paid upfront. In effect, the Comex has technically defaulted on the contractual terms of the 100 oz Comex futures contract.
Ronan Manly of Bullionstar.com has written an excellent analysis of this new paper gold derivative scheme:
And just like that, when you thought bullion bankers and their frontmen, the CME and LBMA, could not create even more paper gold, they just went ahead and did. And it gets better, since according to the CME:
“Once issued, ACEs can be held as long as necessary. A client can use ACEs to comply with short delivery requirements (1 ACEs reflecting one futures contract of 100 oz) or it can be swapped back against a 400 oz bar by exchanging 4 ACEs. A customer can comply with delivery requirements with ACEs or regular bars, or a combination of both.”
Here’s his entire article: Comex delivery problems.
It’s only a matter of time before the markets wake to this reality. At that moment we will see the $100-$200 or more daily moves in gold that many have discussed as an eventuality.
The Shortage Of LBMA Bars Persisted Before Coronavirus
I found it amusing that Zerohedge tried to take credit for reporting the problem of a physical gold shortage on the LBMA and Comex earlier last week. Several of we “gold bugs” have been discussing and reporting on this issue since before the virus crisis exploded. The Comex has been settling contracts that stand for deliver through EFT and PNT transactions by which the counterparty accepts cash payment or the transfer of the Comex obligation to London for several months.
GATA’s Chris Powell expounded on this in a must-read essay on Friday: “What the heck are those mysterious ‘exchange for physicals,’ the mechanisms by which contracts to buy gold on the New York Commodities Exchange are neither fulfilled by delivery on the Comex nor settled for cash there but transported for supposed delivery elsewhere?
The mechanism long has been incorporated by the Comex trading system but was described as an “emergency” procedure undertaken upon agreement by buyer and seller — except that the use of this “emergency” procedure has exploded in the last year, involving tens of thousands of contracts and, nominally, hundreds of tonnes of gold.” Gold Traders Paid Not To Redeem Comex EFPs
Chris Marcus of Arcadia Economics and hash out this issue in our latest podcast:
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You can learn more about Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required): Short Seller’s Journal subscription information – Mining Stock Journal subscription information
“I felt in my gut that something was amiss with the markets a year or so ago and started reading up on sound money/macro. At that time I had most of my money in UK stocks but wanted a way out and a way into the metals. I needed guidance thus why I signed up to your short seller and mining journals.
Today I am way down on the mining stocks and somewhat down on physical silver and gold. But I have offset 80% or so of those paper losses with paper gains on a raft of put options on indexes and sector ETFs. So, thank you for your journals and keep up the excellent work.” – Mike, who subscribes to both journals
Extreme Disconnect Between Paper And Physical Gold
“The further a society drifts from truth the more it will hate those who speak it” – George Orwell
The western Central Banks, led by the BIS, are operating to push the price of gold and silver as low as possible. It’s a highly motivated effort to remove the proverbial canary from the coal mine before it dies. A soaring price of gold signals to the world that the Central Banks have lost control of their fiat currency, debt-induced profligacy.
“In the last 10 years,” George said, “the central banks have effectively shown that when there is a real crisis, gold actually goes down — and it’s so blatant, it’s a joke.” – Peter George, South Africa’s “Mister Gold,” at 2005 GATA conference
The signs of massive intervention abounded last week: record levels of PNT and EFP transactions; aggressive interventionary gold swap transactions by the BIS in January/February (per the monthly BIS statement of operations) – and presumably this month as well; and a big physical dump of gold last Thursday at the p.m. London gold price fix which knocked down the gold price. These opaque Central Bank operations thereby triggered even more paper selling on the Comex.
The most overt signal of the disconnect between the physical and paper markets is coming from large international bullion coin dealers. I have seen three letters from large dealers (BullionStar, JM Bullion and SD Bullion) which detail shortages and an inability to replace what’s being sold. Here’s insightful commentary from BullionStar sent out over the weekend:
“The bullion supply squeeze and shortages are getting worse and worse every day. We are working very hard to source metal but regret that we can not replenish most products as they sell out. We will be getting some additional inventory which is already on the way in transit to us by the end of March. Following that, our expectation is that we may not be able to replenish for months…
Paper gold is traded on the and on the in New York. Both of these markets are derivative markets and neither is connected to the physical gold market…By now it is abundantly clear that the physical gold market and paper gold market will disconnect. If the paper market does not correct this imbalance, widespread physical shortages of precious metals will be prolonged and may lead to the entire monetary system imploding.” – Torgny Persson, founder & CEO of BullionStar
The removal of supply/demand price discovery by the oppressive manipulation of gold and silver in the paper derivative markets has created a shortage in the availability of physical metal, with buyers currently willing pay 50% above the spot price of silver.
This is highly reminiscent of the price take-down that occurred in 2008, a few months head of Helicopter Ben launching his money helicopters AND the massive taxpayer bailout of the big banks. Back then silver eagles were trading at 50-60% over the spot price. This preceded the remarkable 2 1/2 year price rally in gold and silver that took gold up to an all-time high.
Historically, official induced market intervention fails. And when it fails, it fails spectacularly. Gold ran from $700 to $1900 and silver ran from $7 to $49 between late 2008 and mid-2011, before the bullion banks were able to gain control of the price discovery mechanism. This time around the systemic problems – notwithstanding the virus crisis – are far worse than the problems that erupted in 2008.
Barring some type of systemic debt and monetary reset – and I have no idea what something like that would look like – gold and silver will eventually be trading several multiples higher than their current price.
Tesla, Gold And Coronavirus – Fraud And Global Depression
To say the current stock market is in a bubble is an insult to the word “bubble.” Tesla experienced an insanely idiotic stock price move after reporting “shock and awe” headline numbers for revenue and EPS which “beat” estimates – estimates that had been lowered by analysts throughout 2019. But as always there’s plenty of dirt in the details which point to a reality that is far different than is represented by headline numbers and Tesla’s highly orchestrated earnings presentation.
There’s just no telling when this Electric Tulip will inevitably crash. But, as with any investment bubble the popping will happen suddenly and unexpectedly, when the bulls are convinced that the upside is limitless and the bears are in a state of terror.
Meanwhile, the physical gold market which underlies the complicated web of paper gold derivatives continues to push the gold price higher despite aggressive efforts by the western Central Bank and bullion bank price management team. In fact, data from the BIS indicates that the BIS had a heavy hand in the effort to cap the price-rise of gold during January using its physical gold swap and leasing transactions.
Paul at Silver Doctors invited me onto its podcast to discuss these issues
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You can learn more about Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required): Short Seller’s Journal subscription information – Mining Stock Journal subscription information
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.