Something happened yesterday that is very different from the past. Gold and silver exploded higher out of nowhere and even had market stopping volume. Was there any news? Well yes there was, “taper” talk has again made the rounds and CNBC is awash with “taperers,” even Steve Liesman is calling for a December taper. Looking back, gold and silver have always, each and every time a Fed “taper” is discussed …gone down and down hard.
So why all of a sudden do the metals act 180 degrees different and move higher in reverse fashion when “taper” is mentioned than from the last 1-2 years? Could it be that “someone” knows (or has even seen) that the bottom of the barrel is nigh? Has negative (again) GOFO rates scared some shorts into covering or longs into grasping at supply? Or maybe the fact that basically ALL COMEX deliverable ounces are spoken for with December contracts? Could it be that since all 4 Swiss refineries are running full out 24/7, someone of means has put the pieces together? Or maybe “word” is starting to get around that the Chinese finally have their ducks in a row and are willing to kiss their U.S. Treasury reserves goodbye?
I do want to comment about today’s “3,000 contracts” on the buy side which ramped gold higher. When this happens on the sell side (in regular fashion) there are screams of “manipulation. I personally scream as loud as anyone else. I do this because quite simply there are not “pools” of real gold sitting around in sizes of 10, 20, 50, 100 or more tons of gold to be sold. Even if there were, no trader would sell in a fashion that crushes the price. I have heard many gold bashers ask the question, “Why is it not manipulation when it is bought in this very same fashion?”
Follow this through; 1 ton of gold is worth less than $40 million. 10 tons is worth a little less than $400 million. Even when talking about 100 tons you are speaking of less than $4 billion. Notice the “$” sign used before these numbers? They are “dollar” signs. Just to refresh your memory, the amount of “dollars” outstanding is in the trillions, China has almost $4 trillion on their own. My point is this, in today’s world $400 million is absolute chump change. Would it be illegal for some billionaire or fund to pony up $400 million and request 10 tons of gold to be delivered? No, in no fashion whatsoever. Would it be illegal for someone to “sell” $400 million (10 tons) of gold? Well it depends. It depends on whether they actually have the gold to sell (or this amount held somewhere to hedge) or not. Very few entities on the planet control 10 tons or more of real metal, contractually selling ANYTHING that you do not “have” available to deliver (or hedge against) IS illegal. Let me clarify this just a bit, yes you can “speculate” on the short side but not in volumes that are larger than what actually exists for sale or to hedge. So through stepping up to purchase gold in a “sloppy” fashion is not really smart…it is not illegal if you have the dollars to deliver. Conversely, selling in sloppy fashion without the metal to deliver IS illegal (at least for anyone not “officially sanctioned”).
The current “tightness” in physical supply and “the end game” as I believe this to be is really just a simple and logical outcome of the fiat system itself. Since more and more “money” can (and must by definition) be created, it only stands to reason that “dollars” become more plentiful and thus less valuable. Another way to look at this is that if gold “supply” has increased at less than a 2% growth rate over the years while dollar “supply” has grown at 7-10%, shouldn’t it take more and more dollars to exchange for gold?
Since the egregious month of April this year, gold bears have consistently claimed that “us whiners” claim manipulation only on the downside but never to the upside. Was yesterday’s 3,000 contracts “manipulation?” Maybe? Probably? Or maybe it was just some fund or wealthy individual trying to offload the miniscule amount of 400 million “dollars?” This explanation doesn’t really make sense to me because as it stands right now, COMEX registered inventories are not large enough to deliver to those standing for delivery this month. If someone really wanted physical metal why would they try to procure it from a source that looks to be very low on inventory if not dry?
To put it bluntly in my opinion, COMEX is no longer a source of gold in any large size; it only serves as the “pricing mechanism.” Yes there have been outsized sales and the thought process is that because the banks basically have “unlimited funds” available they can “sell” as much as they’d like…but…COMEX is being drained of supply by their own admission so why in the future will anyone continue to play in their sandbox?
And THIS is exactly where we are today, Asia is in the process of opening 6 PHYSICAL exchanges which when all is said and done will make the COMEX a moot point whether they have anything left to deliver or not.