Bullion Banks Continue to Hemorrhage Physical Gold, and Now, Also Physical Silver

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The first article I published about the factors driving massive divergences between the prices of spot and physical gold on my news site in late March in which the bullion banks had started to hemorrhage physical gold, but had not yet started to hemorrhage physical silver, received more than 316,000 reads on ZeroHedge. And even before this article of mine received massive exposure on ZeroHedge, I had penned an article two weeks prior that addressed the situation I explained more in depth in the above aforementioned article titled, “Violent Price Divergences Are Developing Between Physical Precious Metals and Futures Prices,” which, by the way, is a reason to subscribe to my news site rss feed or bookmark my news site if you don’t wish to miss the multitude of articles I publish.

Let’s revisit that data from this past March that resulted in an unprecedented amount of long gold futures contracts requesting physical settlement and compare the latest data from the COMEX as of the close of 4 August, 2020. Back then, I noted that the COMEX Issues and Stops report indicated that the net action between December 2019 and the end of March 2020 indicated that 1,411,650 AuOzs of the inventory backing gold futures trading (“registered” gold) in New York was encumbered for physical delivery, with the exception of “load out” gold, which I will explain below.  Furthermore, the absurd claims made by some that there was no shortage of the yellow metal in COMEX warehouses that followed my March article, due to the large quantities of “eligible” gold inventories reported by COMEX only exposed the complete lack of understanding about the delivery process by those making such claims.

Once long futures contract holders stand for delivery, the CME delivers to them ownership of a warrant for the amount of gold for which they requested physical delivery two days after announcing their intention of taking physical delivery.  A warrant is a legal document of title for the physical metal, whether gold, silver, or platinum. The warrant contains all relevant information related to the metal and is created by the depository to be held in the exchange’s systems by the owner’s clearing member firm. However, for those that merely glanced at the “registered” gold inventory reported by COMEX warehouses and stated, massive amounts of physical gold were not leaving the warehouses, just because a long futures contract holder stands for delivery does not mean he or she has to remove the gold from the COMEX warehouses. Since he or she now has the legal warrant providing him or her title to that physical amount of gold, he or she could sell the warrant to another private owner, or hold on to the warrant for later physical removal but leave the physical gold in the inventory of the warehouse. 

It is only if they choose the “load out” option of removal from the COMEX warehouse for storage elsewhere that the physical gold would then be observed as a reduction in the reported COMEX data. Otherwise, the physical gold in COMEX warehouses, though it may be stored there, would remain encumbered and ineligible to settle other requests for physical delivery.  Furthermore, the fact that CME eligible gold warehouse stocks significantly increased from 15.369M AuOzs as of its 6 May 2020 report to 21.206M AuOzs as of its most recent report on 4 August as of the writing of this article is meaningless, as I’ve seen some analysts point to this increase in eligible inventory as “proof” there is no physical gold problems in New York futures markets.

Think of eligible gold as vaulted gold, no different than a private vault anywhere in the world. Eligible gold does not back gold futures trading at all as it could be gold owned by institutions, pension funds, private endowments, billionaires and so on that is merely vaulted in the COMEX warehouse and therefore is not “eligible” to back gold futures trading. Again, this is an example of how bankers deliberately misname categories to try to induce maximum confusion about what their reported data actually means, because any logical naming system would not name “ineligible” gold as “eligible”. Instead, if we look at the registered gold category, the explosion of registered gold from 6.423M AuOzs to 15.270M, a 2.4X increase in just three months is significant, because this represents the physical gold in COMEX warehouses with attached warrants specifically tied to gold futures trading in New York.

Those that don’t understand the delivery process and believe that when long gold futures holders stand for delivery that the inventory immediately leaves the warehouse mistakenly point to this data and will state that there obviously was never any type of physical gold problem this year in New York. Of course, such false claims ignore the fact that:

  • We can’t even be sure of the validity of this reported data because there is never any independent third party that conducts audits of the COMEX warehouses and bankers are notoriously untrustworthy when reporting gold data. In fact, if I had to guess, I would guess that the date is not reliable. It is no mistake that the CME includes this disclaimer in all their gold data reports: “The information in this report is taken from sources believed to be reliable; however, the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness.”
  • If there were never any physical gold shortages and problems in the NY futures markets, there would never have been a need for entirely new rules to be applied to gold futures trading in New York, including the creation of a completely new “pledged” category, the introduction of a new Accumulated Certificates of Exchange (ACE) process by which a standard 400-ounce good-for-delivery bar can be used to fulfill physical delivery requests, and the introduction of gold bars from new refiners as acceptable for physical delivery in addition to the usual list of LBMA approved refineries in other locations of the world like India, which signals a shortage of physical gold not just in New York but in other global markets as well.

Regarding the introduction of the new ACE delivery process above, since the most traded gold futures contract, by far, in New York is the 100-oz contract, obviously, a 400-oz good-for-delivery bar cannot be matched by warrant to an individual that stands for delivery on just one gold futures contract. Thus, the CME has stated that each bar would necessarily have to be matched to 4 contracts that stood for delivery, which conceivably could mean that four different people would have claim to the same exact bar of gold. Consequently, what would happen if these four people decided all to “load out”, meaning that they decided to remove their partial claim of this one gold bar for storage elsewhere. The CME has been silent about how such a request would be handled, though of course, it would require either finding  four unencumbered 100-oz bars to fulfill the load out request, or melting down the good-for-delivery bar and refabricating it into four new 100-oz bars, which of course, would add to the expenses of delivery. And in such a scenario, is the CME going to pick up these expenses or will they attempt to force these additional expenses unfairly on the owners of the gold?

Consequently, let’s observe the below charts I compiled that reveal the net effects of the issues and stops report from the date of December 2019 to 4 August 2020. As is no surprise, JP Morgan is the preferred bullion bank of US Central Bankers to conduct business in the gold and silver futures markets as a quick glance at the charts reveals JP Morgan’s dominance in both markets.

CME Issues and Stops report for August 2020, 100-oz gold futures contract
CME Issues and Stops Report, August 2020, 5000 oz silver futures contract

With clients, if the number of stops is greater than the number of issues, then this results in a positive number of new warrants and a greater registered inventory, and vice versa. With the house category, if the number of issues is greater than the number of stops, then then this results in a positive number of new warrants and a greater registered inventory, and vice versa. So, conducting basic math from the numbers I compiled below, we can determine that in this time period, the bullion banks, in the cumulative combined client and house accounts, suffered losses on physical gold inventory of 1,938,500 AuOzs or 60.29 metric tonnes of gold, up from the losses on 1,411,650 AuOzs as of 28 March. With silver, the numbers are even more interesting than with gold and perhaps help to explain the massive outperformance in silver versus gold this past month. As of 28 March, the net cumulative data from the CME Issues and Stops report from the combined client and house accounts indicated that the bullion banks had added 3,290M AgOzs to their inventory between December 2019 and 9 April 2020.

However, as of 4 August, this figure was a net loss of 34.685M AgOzs, or almost 1,079 metric tonnes, marking an enormous swing of 37.975M AgOzs in misfortune for the bullion banks. On 9 April, in their client accounts, the bullion banks  suffered a net loss of 1.645M AgOzs but they more than offset this net loss in their house accounts with a net gain of 4.935M AgOzs. However, by 4 August, the bullion banks had suffered net losses in both client and house accounts of more than 17M AgOzs in each category.  Perhaps this is one of the primary reasons driving the spot gold: silver ratio from a high of 125: 1 just four months ago down to about 101.7: 1 today, which I believe will continue to significantly shrink due to silver’s still significantly underpriced (not undervalued) status.  However, please note that the gold: silver ratio represented by Canadian gold maple leafs: Canadian silver maple leafs, while still high, is drastically lower at 62:1, as it is always critical to note gold: silver ratios in terms of physical prices, not spot, when buying physical metals.

Also, the net accumulation of bank clients of physical silver over gold of 18:1 should probably have been higher, and this is not something I’m stating just with the 20/20 clarity of hindsight. All my patrons know that in 2019, I constantly harped about the underpriced nature of silver and urged accumulation of Canadian silver maple leafs, informing my patrons to ignore the “silver is dead” narrative that existed back then after spot silver fell to just about $14 in 2019. And again, even though my call was a little early because spot silver fell to $12 in March of this year, for those that purchased silver coins in 2019 based on my analysis, they never moved into losses on these purchases because the prices of real silver diverged tremendously from the prices of spot silver from Q1 of this year. Consequently, even in March, when spot silver prices plunged, they were unmatched by a similar plunge in physical prices, though the spot price plunge caused many to reiterate the narrative of “silver is a dead asset”. On the contrary, I doubled down and told people to keep stacking more, so realistically with silver, even if you only became an skwealthacademy patron just five months ago, you would be sitting on enormous profits on all silver assets that I’ve discussed.

As you know, several prominent media personalities that regularly appear on US financial television shows stated that they had sold all their gold the first time spot gold breached the $2,000 futures price last week, merely because that price marked the nominal high of gold futures prices from 2011 and due to their belief that gold’s price run was no over. Those sentiments are absurd, as it’s difficult to understand how someone with those sentiments ever purchased gold in the first place, as the reasons to own gold at $2,000 futures prices are even stronger than the reasons to own gold when futures prices were hundreds of dollars less. In any event, I imagine that such people never owned any real gold to begin with, and that by announcing their divestiture of gold, they likely meant that they sold paper gold ETFs that they had owned. If any of these personalities had purchased real physical gold and understood the reasons that are driving the divergences between futures and spot gold prices and spot gold and real physical gold prices, they would have never completely divested of their physical gold.

In a year in which the risk of a complete global financial meltdown has become highly elevated, and likely very narrowly missed just this past March, as I discussed in detail here, divesting of all physical gold holdings makes zero logical sense. In past articles, I disclosed how the recent strength of gold futures prices was likely aided by China’s no tolerance policy for spoofing gold futures prices lower in their futures markets, a practice widely deployed in London and New York futures markets. Now that you know the reality behind various factors continuing to drive real physical gold and silver prices higher, you will not make the same mistake.

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