Is there a gold backwardation or not?

[Unbeatable]

I think Paulson finally selling his SPDR stake is extremely bullish.

I couldn't understand how the person who made the 'greatest trade ever' and made $15 billion for his firm in the sub-prime crash could be so confident about gold (Even though it lost him lots of investors) but yet be so willing to have his a long position concentrated in a fractional reserve gold product like the SPDR.

Though he has sold over half his SPDR holdings in the 2nd Quarter, as recently as last month, according to Bloomberg,

John Paulson, who told investors as recently as last month that they should own gold....

At an investor conference on July 17, Paulson affirmed a commitment to investing in the metal and stocks of producers to hedge against currency debasement as central banks pump money into economies

http://www.bloomberg.com/news/2013-08-14/paulson-cuts-spdr-gold-stake-53-as-soros-sells-out.html

Do you think it's more likely that

a) He is lying to investors while he quietly exits/massively reduces his four year gold trade or
b) He recognises the time to get out of fractional reserve products is now and has moved into physical even though costs are higher?

(As for the WGC report, I think they may have under-reported China's numbers to get to that figure, (The SGE alone delivered 440 tons in the 2nd Quarter and I doubt that covers all of their demand, I'll look at it more in depth later.)

 

[Unbeatable]

I will concede to bronsuchecki, that reading the WGC Q2 report that they also suggest that the high Asian premiums in Q2 at least were a result of refinery capacity and not supply

..gold price premiums that were reached during the second quarter in a number of markets were the result of bottle-necks in the supply chain as refiners, even working at full capacity, struggled to convert larger gold bars (London Good Delivery bars and 100-oz bars) into smaller bars fast enough to meet the needs of Asian consumers.

But at the same time it clearly seems that even though the Perth Mint may have had enough supply, in general 'Mine+Scrap supply' was not sufficient to meet demand and LBMA/COMEX/ETF 100oz & 400oz bars were needed to meet Asian demand.

But if ETF outflows slow (and they are...)

July’s pace of gold-fund outflows slowed a bit to $2.6 billion, versus $4.3 billion during June. Both months’ tallies were smaller than May, which itself was second to the April exodus.

http://blogs.barrons.com/focusonfunds/2013/08/05/gold-etf-outflows-near-31b-blackrock/?mod=BOLBlog

Where will the supply to meet Asian demand if it continues to remain high come from?

 

[bushi]

"gold ETFs post outflow of 402.2 tons"

Does this mean that investors pulled the dollar equivalent of 402.2 tons out of the paper markets? That, IMO, doesn't really speak to demand for physical gold.

..to quote good old Max Keiser: "in three months of the recent PM smash, the futures market dumped the same amount of paper gold into the market, as is consumed in China in just TWO WEEKS, of retail physical demand for gold"

"gold ETFs post outflow of 402.2 tons"
Also, I wonder if the World Gold Council's report of central bank acquisitions includes China. IIRC, China doesn't publish or release that info to the WGC.

nobody knows how much Chinese CB is buying, this is kept secret, between official announcements of how much they increased their "stack", since last announcement.

 

[Unbeatable]

I also asked bronsuchecki the question of whether or not there was an arbitrage opportunity for people with access to Comex inventory to make a profit by selling East? I said if this were the case but the free market was not doing it, it would suggest that the Comex has a form of 'capital controls' in place and has already mathematically 'technically defaulted' (Given that SGE physical demand could consume the Comex inventory in 1-3 months)

It looks like Sprott has already looked into this matter with the GLD and provides some compelling evidence to suggest the bullion banks are arbitraging based on the Shanghai premium but they are using GLD stock to do it instead of Comex inventories.

It is clear that demand for physical gold in Asia is strong and that the price of gold in these markets is well above the “Western” price. This creates arbitrage opportunities for market participants that have access to large and cheap quantities of physical gold in the West. The bullion banks happen to be the only ones able to redeem GLD shares for gold, and the GLD, with its 1,000 tonnes of inventory, acts like a large physical gold bank.

According to the GLD prospectus, the bullion banks can create or redeem units for as little as 10bps (0.10%). Even with transport and insurance costs (which are arguably lower for large transactions and large international banks), there is a clear arbitrage opportunity for the bullion banks when the Shanghai premium (or any other physical gold price premium in emerging markets) is as large as it has been recently.
Moreover, because of the intense demand for physical gold we have seen so far this year, it is very probable that the bullion banks themselves are in a shortage of physical gold, hence the need to use the GLD reserves.

This shows a high negative correlation between the GLD inventory and the Shanghai premium. It would appear that the bullion banks are using GLD inventory to either arbitrage or just satiate some of the Asian demand when the Shanghai premium gets high.

Clearly the fact that they are not dipping into the Comex stockpile to do this (It wouldn't last very long if they did) IMO means the Comex is already dead never mind under stress or risk of default.

 

[Unbeatable]

I looked at the 2nd quarter WGC report and I think something has happened that has never happened before - Consumer demand alone outstripped mining & scrap supply!

http://www.gold.org/investment/research/regular_reports/gold_demand_trends/

Mining + Scrap supply__________________= 1025.5 Tons
Consumer (Jewelry/bars/coins) demand_______ = 1083.2
Technology demand_______________________= 104
Central Bank Net Purchases_________________= 71.1
OTC investment and stock flows______________= 151
Shortfall____________________________= 373 Tons

(Imagine if the RBI hadn't 'luckily' squashed Indian demand from 162 tons in May to 31 tons in June! They could be looking at a shortfall of 450-500 tons for one quarter!)

ETFs and similar products were___________________ -402.2 Tons
Which is of course what was able to supply the rest of the market....

Clearly that level of demand is not sustainable. According to Barron's, 2/3 of the ETF outflows came from the GLD

http://blogs.barrons.com/focusonfunds/2013/08/05/gold-etf-outflows-near-31b-blackrock/?mod=BOLBlog

and they only have 900 tons of inventory left...

So wedding season, soaring inflation and prohibition - I don't think real Indian demand is stopping anytime soon and as PMBug says those numbers probably don't take account of Chinese central bank purchases either...

 

[bronsuchecki]

Have you by any chance been tracking / charting this metric (since at least the time of that post)? It would be interesting to see the trend and historical action in that context.

I track it with http://www.sharelynx.com/gold/CMXAUStockpilesoo.php which is a subscription site, but you can get a free trial here http://www.sharelynx.com/trial.php and it is worth it IMO.

 

[bronsuchecki]

But my final attempt on this front is to ask you. Do you not at least think this is 'very unusual'?

I obviously haven't scrutinized the Comex history but a bullion bank losing 80% of their combined stockpile over a period of 7 months, I would imagine is unprecedented & would certainly fall under 'very unusual', no?

It is unusual in that why did JPM start a vault just to have it run down and not be used. As to all this Zero Hedge hype about JPM running out, keep in mind that JPM did not have a vault for many years and yet was still able to deliver into its shorts - because a short can deliver using a warrant for metal in any Comex vault.

 

[bronsuchecki]

But the entire annual silver supply (mine+scrap) is only worth +-$20 billion at current prices and even if India took a much greater than usual share of that it would only have a negligible impact on their CAD, so why do so much to discourage silver imports too?

Because I think they could see that gold demand was shifting to silver and that would still have meant the same $$ impact on CAD. They just don't want Indian's sending any money offshore, which is why you'll see they have put in more capital controls as well http://capitalmind.in/2013/08/rbi-s...oad-or-gold-coins-increases-capital-controls/
this is not just about PMs, it is about stopping any money flowing out of India (they don't see PMs as money unfortunately) to support the rupee.

 

[bronsuchecki]

I think Paulson finally selling his SPDR stake is extremely bullish.

I note that FT is reporting that " Paulson & Co offset much of its sale of about 1.1m ounces of bullion held in SPDR Gold Shares in the second quarter by buying gold swaps on the over-the-counter market" so his sale of GLD not so negative as first reported, he is still long gold.

 

[bronsuchecki]

But if ETF outflows slow (and they are...) Where will the supply to meet Asian demand if it continues to remain high come from?

If the existing holders are willing to sell it at these prices then it will be fine, but at some point price will have to rise to induce people to let their gold go so the Asians can buy it.

 

[bronsuchecki]

I also asked bronsuchecki the question of whether or not there was an arbitrage opportunity for people with access to Comex inventory to make a profit by selling East? I said if this were the case but the free market was not doing it, it would suggest that the Comex has a form of 'capital controls' in place and has already mathematically 'technically defaulted' (Given that SGE physical demand could consume the Comex inventory in 1-3 months)

It looks like Sprott has already looked into this matter with the GLD and provides some compelling evidence to suggest the bullion banks are arbitraging based on the Shanghai premium but they are using GLD stock to do it instead of Comex inventories.

This shows a high negative correlation between the GLD inventory and the Shanghai premium. It would appear that the bullion banks are using GLD inventory to either arbitrage or just satiate some of the Asian demand when the Shanghai premium gets high.

Clearly the fact that they are not dipping into the Comex stockpile to do this (It wouldn't last very long if they did) IMO means the Comex is already dead never mind under stress or risk of default.

I'm not sure I get your point about Comex - total gold warehouse stocks have declined from 11 million oz at the beginning of this year to 7 million oz - that is 124 tonnes so some dipping into Comex is happening.

 

[bushi]

I don't think real Indian demand is stopping anytime soon and as PMBug says those numbers probably don't take account of Chinese central bank purchases either...

Depletion of the Comex inventories, might be very much related to Chinese CB buying. Witness Rickards' "Currency Wars", and his scenario, in which Chinese Sovereign Wealth Fund has a network of shadow funds, all operating in open futures market, and at some nice day, receiving order to not roll the paper contracts anymore, but opt for physical deliveries instead. All this gold is heading to China/India anyway. Might be in part for the central bank, that we will never know, because China is buying physical gold all around the globe in every form possible (mines, etc.), and it is military intelligence-led operation for them.


EDIT: BTW, the book is much better, more detailed, and less sensationalist:
[ame="http://www.amazon.co.uk/Currency-Wars-CURRENCY-Aug-28-2012-Paperback/dp/B009T4W8LW/ref=sr_1_2?ie=UTF8&qid=1376645789&sr=8-2&keywords=currency+wars"]Currency Wars: The Making of the Next Global Crisis CURRENCY WARS: THE MAKING OF THE NEXT GLOBAL CRISIS by Rickards, James Author on Aug-28-2012 Paperback: Amazon.co.uk: James Rickards: Books@@AMEPARAM@@http://ecx.images-amazon.com/images/I/51bHgSZCxBL.@@AMEPARAM@@51bHgSZCxBL[/ame]

 

[Unbeatable]

Sorry Bushi, that video was very funny to me! (Personally I highly doubt that the Chinese CB wants the Comex's piddly 220 ton stockpile, especially when taking it would send the price of gold sky high, I think they much prefer the SGE being able to import that amount every month or two at these fake prices.)

James Rickards - Advisor to the Pentagon and CIA

IMO he works for the intelligence services and this video & the book were both sanctioned by them. His currency war scenario looks EXACTLY how I'd expect a desperate American playbook to look and nothing like what I'd expect the Chinese to do.

1. The Comex have a farts worth of gold left - 220 tons, IMO given the gap between mine&scrap supply and physical demand in Q2 it seems likely the entire bullion bank fractional reserve system will collapse soon, without China lifting as much as a finger, let alone -

Use backchannels to create a seemingly unconnected web of hedge funds that suddenly demand physical delivery.

But Jim is kind enough to give us a page out of the US/Comex playbook as to how they may justify changing their delivery system and who will be their scapegoat.

Comex uses it's powers to freeze the price of gold and as a direct strike to Chinese interests, bans physical deliveries of gold on the futures contracts.

Because when the rush for physical is on, that we all know is coming, and it seems like most hedge funds are panicking and standing for delivery. No! They are really mostly a secret web of funds set up by the Chinese! :rotflmbo:


I think everyone here also knows the Market is so fragile and so far removed from the fundamentals that it could easily crash soon especially if the price of oil spikes, and everyone will rush for the exits. But No!! It's not a problem with the markets, the American playbook will find a way to blame the Chinese for that too, because in Jim Rickards currency war scenario -

The Chinese weren't just... stockpiling gold futures contracts. They also had their web of hedge funds take positions in a highly leveraged block of separate derivatives, Out of the blue, China orders these hedge funds to sell these secret holdings all at the same time. An economic Pearl Harbour we never saw coming.

:rotflmbo: Next...

Chinese hackers then unleash cyber warfare attack on the US to disrupt our financial exchanges, bank transactions, the power grid and the internet backbone.

So IMO, he's just let us know that one of US playbooks is to try to blame EVERYTHING - the collapses of the Comex, Stock Market and Financial system on the Chinese and also use this playbook as an excuse for the intelligence services to take over control of the internet in US too.

 

[pmbug]

It is unusual in that why did JPM start a vault just to have it run down and not be used. ...

Assuming that opening the vault served a rational purpose, and it wasn't to fulfil a market need as you explained, one could be forgiven for speculating on shenanigans.

 

[pmbug]

Another anecdote for the fire:

Mihir Dange, co-founder of commodity trading firm Grafite Capital clarified gold backwardation for Bloomberg, ... dropped this bombshell on the Bloomberg host:

“...
In our office we tried to buy gold when it got down to around $1200 to $1250, it’s been 8 weeks, we still haven’t received our order of physical gold!“
...

http://www.silverdoctors.com/gold-shortage/

 

[bushi]

Sorry Bushi, that video was very funny to me!
(...)
(...)

...hmmmm... All good points, Unbeatable, and certainly a big mouthful of food for thoughts. Hard to disprove anything you said in that post.

 

[Unbeatable]

I said additional Indian silver demand would have a negligible impact on their CAD but you said...

Because I think they could see that gold demand was shifting to silver and that would still have meant the same $$ impact on CAD. They just don't want Indian's sending any money offshore, which is why you'll see they have put in more capital controls as well http://capitalmind.in/2013/08/rbi-s...oad-or-gold-coins-increases-capital-controls/
this is not just about PMs, it is about stopping any money flowing out of India (they don't see PMs as money unfortunately) to support the rupee.

Let's assume I'm wrong and you're right and that 'gold demand was shifting to silver and that would still have meant the same $$ impact on CAD'. Well in May, Gold had a $7 billion dollar+ negative impact on their CAD, if silver demand even had half of 'the same $$ impact on CAD' that would be $3.5 Billion+

At today's prices that would be enough additional silver demand to consume the Comex stockpile of 160 million ounces in just over a month, or alternatively send the price of silver to the stratosphere.

Yes, I'm sure the West &/or the bullion banks wouldn't have anything to say about that...

 

[Unbeatable]

I'm not sure I get your point about Comex - total gold warehouse stocks have declined from 11 million oz at the beginning of this year to 7 million oz - that is 124 tonnes so some dipping into Comex is happening.

My point is that the GLD flows as well as the current Comex dipping, (which you've just acknowledged) show that the Shanghai premium moves gold from West to East.

So either there isn't enough demand to completely drain the Comex right now - 'Oh darn, shucks, we can't find anymore Chinese fools willing to pay us a lovely premium for our barbarous relic!' or the Chinese demand is there but the Comex is trying to limit the amount of gold they are leaking.

But the continuing presence of high SGE deliveries and a high Shanghai premium show that it is the latter.

So my point is that the bullion banks are...

 

[pmbug]

... The current coverage ratio for gold is 17.7% and silver 24.5%. Looks like plenty of metal for redemptions.
...

Your calculation combined registered + eligible, correct?

Comex Registered Gold Cover Ratios Hit Unprecedented Levels: Over 50 Claims Per Oz.

... In this article we will cover the COMEX gold cover ratios, which is possibly the most important COMEX indicator because it tells an investor how many ounces of gold are stored at the COMEX for every outstanding gold contract.

This ratio is only regularly observed by some of the most sophisticated gold market participants. But recently, just as we have seen unprecedented drops in COMEX inventories, we are now seeing this ratio reach levels that have not been seen before in recent COMEX history and we believe gold investors should give it some attention.
...
The COMEX gold cover ratio is simply the number of COMEX contract ounces of gold (you can find COMEX contract open interest here) divided by the number of physical ounces present in COMEX warehouses. It essentially gives investors and idea of how many ounces of gold are stored at COMEX for each outsanding claim. A high ratio signifies many claims for every ounce of gold, while a low ratio means that there are only a few claims per ounce of gold.

... So now let us take a look at the gold cover ratio for both registered and eligible gold contracts.

In the chart above, investors can see that the cover ratio for COMEX eligible gold stocks is around 5.62 (last mini-chart), or there are 5.62 owners per every ounce of eligible gold stored at the COMEX. While it has been increasing and is relatively high for the last five years, the ratio still isn't at its peak levels from 2003 and 2004 where there were more than 10 owners per ounce of gold. Based on this chart, it is interesting that it has been rising, but the eligible gold cover ratio is really not alarming for gold investors.

But what is very interesting has been what has been going on with the registered gold cover ratio.

In the chart above, investors can see that the cover ratio for COMEX registered gold stocks is around 50.62 (last mini-chart), or there are 50.62 owners per every ounce of registered gold stored at the COMEX. While the eligible gold cover ratio was not particularly interesting - the increase in the number of owners per registered ounce has been stunning!

Additionally, we believe that this ratio is much more important than the eligible gold cover ratio because it signifies how much deliverable gold backs outstanding contract. Investors should remember that eligible gold (the previously discussed ratio) is gold stored at the COMEX but NOT available for delivery - so it cannot be used to physically settle an outstanding contract's demand for delivery. Registered gold (the type we are now discussing) can be used to settle delivery, and thus it is much more relevant when discussing cover ratios because it actually can be used to "cover" a contract.

The increase we are seeing in registered cover ratios is unprecedented and is 25% higher than the previous high that was seen in the middle of 2011 when gold hit its all-time high over $1900 per ounce. It seems there is something strange going on in the gold market.
...

More: http://seekingalpha.com/article/163...it-unprecedented-levels-over-50-claims-per-oz

 

[S Roche]

Re Paulson & GLD

"I couldn't understand how the person who made the 'greatest trade ever' and made $15 billion for his firm in the sub-prime crash could be so confident about gold (Even though it lost him lots of investors) but yet be so willing to have his a long position concentrated in a fractional reserve gold product like the SPDR."

The confusion exists because of poor reporting.

One of Paulson's funds is redeemable in gold. He hedges that fund's obligations with GLD. That fund saw redemptions and accordingly he lowered his GLD exposure.

At the same time Paulson has been increasing his largest position, in OTC gold swaps. This information was first provided by Jack Farchy in the FT http://www.ft.com/intl/cms/s/0/f087b93a-05bd-11e3-8ed5-00144feab7de.html#axzz2cUXzRAdO and can be found on the web now from many sources.

Unfortunately, the mis-reporting of Paulson's positions continues.

ps It was more like $20 billion ref Greg Zuckerman's "The Greatest Trade Ever"

 

[pmbug]

Hey SR, welcome to the forum. :wave:

Good info. Thanks!

 

[Unbeatable]

Yes hi SR, good info, welcome

In other news I see

The UK exported 240 tonnes of gold to Switzerland in May alone, while its exports over the first half of this year totalled 797 tonnes, Macquarie said in a note. In contrast, Britain exported just 92 tonnes of bullion to Switzerland in the whole of last year, it said.

http://www.zerohedge.com/news/2013-08-20/gold-flooding-out-london-switzerland-alarming-rate

Wow, lucky for them that India independently decided to ban buying gold on consignment at that time, otherwise we might have had a problem.

 

[S Roche]

India

If you like conspiracy theories, (and I don't), then maybe you should focus on the relentless selling of the INR to force India to puke up their gold...

http://www.mineweb.com/mineweb/content/en/mineweb-gold-news?oid=201866&sn=Detail

My view is that all this conjecture is interesting, but meaningless.

 

[Unbeatable]

There is a program in the bg, which I'm sure is perfectly innocent, 'b.scorecardresearch' but it makes my computer freeze/hang when I click on that mineweb link.

I think this is the gist of the story though

India mulls leasing the 200 tons of gold it bought from the International Monetary Fund in 2009

My $.02

1. It assumes 200 tons of physical was set aside for India & they weren't just given a receipt.
2. That it hasn't been leased out already.

Even if the gold is there, 200 tons of gold doesn't buy the West much time. Gold has been flooding out of London to Switzerland at an average rate of 133 tons a month for the first half of 2013 vs. only 7.5 tons a month in 2012. http://www.zerohedge.com/news/2013-08-20/gold-flooding-out-london-switzerland-alarming-rate

Also when a currency rapidly loses value, people try to get rid of it as fast as possible for something of value, usually and especially in India that will be gold. So personally I think a crashing Rupee will have the opposite effect.

 

[DSAbug]

uh.. destroying the indian rupee is only going to create more demand for gold there. If the dollar was falling, would you expect demand to increase or decrease for gold? I think people have been conditioned to expect every piece of news is bad for gold and/or going to cause it to fall.

IMO.. we are climbing out of the hole like we did in 08... Don't know many people who held through the RISE.

 

[pmbug]

...
India has no proposal to lease gold bought from the IMF according to India’s Economic Affairs Secretary, Arvind Mayaram. His comments came in a text message.

The influential in India, Hindu Business Line newspaper, had reported earlier that the government will consider leasing out 200 tons of gold bought from IMF in 2009, citing finance ministry officials it didn’t identify.
...

http://www.zerohedge.com/contribute...se-gold-bought-imf-russian-gold-holdings-rise

Doesn't mean a proposal won't be developed...

 

[S Roche]

This from Grantham in April 2013 I found interesting, touches on India. The authors' view is that gold is more driven by emerging markets than is generally credited in the West.

https://www.gmo.com/America/CMSAtta...G+op1M7ainSHY2Fli+gOFdGKOukKZ6MwvCgjyc1AQECM4

 

[Unbeatable]

I think their thesis is incorrect, they think Asian demand is the key driver for gold prices. When in fact that is the whole problem with the gold market, despite making up the huge bulk of demand, they don't drive gold prices (yet).
The clearest indication of this is the April price crash - there was no decline in Asian demand precipitating it, in fact China had a massive March. Then after the crash Asian demand has been unprecedented, so according to them we should be at all time highs right now

Even at the time of the report, they made the correlation for some unexplained reason using some 95-2002 time period, using countries like Thailand & Korea and even then the correlation was really weak and the price action just happened to slightly correspond with a price decline followed by a stabilisation.