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December has arrived and with it the spectacle of COMEX delivering on contracts.  Gold went to first notice day on Friday with 1,020,000 ounces of gold standing for delivery.  This is in contrast to the registered inventory holding only 590,000 ounces available for delivery.  How will these 1 million ounces of gold be delivered?  It is hard to tell but suffice it to say that 400,000+ ounces need to be delivered in to make up the deficit.  Last year if I recall, 1 million ounces were delivered in for December as it also had a large amount standing for delivery.

That was last year, this is this year.  The difference being that China had not already “Hooverized” the planet by picking up all of the gold that they could.  Yes they did have a big appetite but that has grown further this year.  We also had not seen any plundering of GLD for 500 tons and LBMA had not yet seen 1,300 tons vanish from their coffers.  Another quite interesting situation is that there have only been 80 contracts “served” in the first 2 days.  This represents only 8,000 ounces.  This is odd because it does not benefit a “short” in any way to wait until later in the month to serve for delivery.  Carrying costs will only add up each day whereas the “ounces” are the ounces today just as they will be on Dec. 31…they don’t “shrink.”

“Why” would a short ever wait to serve delivery if by waiting their costs only increase each day?  One can only guess that possibly the gold is not there and must be sourced.  How can I say something as heretical as this?  Because we already know that AT LEAST 400,000 ounces need to be “sourced” because according to the COMEX themselves, registered inventory is not sufficient in quantity to make deliveries.  Again, why has there only been 8,000 ounces served in the first 2 days?  Is it possible that some of these shorts are offering a premium “in cash” to forego physical settlement?  What!???  This is heresy!  This would/could never EVER happen; it will be the battle cry!  If you think about it, ANYTHING “crooked” can (and does) happen on a daily basis so why would this be any different?  If you actually believe that “crookedness” doesn’t exist nearly everywhere in the financial markets…then sorry, that’s your opinion and will ultimately be your problem.

Has all of the gold been delivered yet from the October and November contracts?  I haven’t seen enough gold exit the warehouses yet to say that these deliveries have been satisfied.  For that matter, a case can be made that not all of the physical deliveries going all the way back to June have been made but that would be just plain conspiratorial wouldn’t it?  Please keep in mind that going back to Jan. 1st there has been very little gold that has entered the registered vaults and a drain of nearly 3 million ounces has already occurred to this point.  We have seen over 80% of the beginning inventory already exit this year…yet no one seems alarmed.  I don’t get it but maybe I’m not supposed to?

This year has been a one way street where gold has done nothing but exit Western inventories and gone East.  China alone has already imported over 1,000 tons (30 million ounces) this year.  Then you have the rest of the world to account for.  It is clear beyond a shadow of a doubt that well over 3,000 tons of demand can be accounted for on the back of an envelope while global supply is only 2,200 tons.  The gold had to come from somewhere right?  We even know the answer to this question, COMEX, GLD and LBMA have “bled yellow” so to speak…to the tune of roughly 2,000 tons.  The tightness has grown so acute that unfortunately this bleeding has now started with one of the truly good guys.  Sprott physical gold ETF has now seen smallish redemptions due to trading at a discount and has had to deliver out gold…no doubt also headed East.

This cannot go on forever and those in the East know this full well.  Why do you think that 6 different “cash” metals exchanges are being set up to go live shortly?  Because they know (or have been told) that shortly the deliveries will cease.  The West has been built on “fractional reserve” everything.  This works…for a while…especially with the currency itself because that can be freely created and provided.  In gold, silver, oil, wheat or heating oil, etc. …not so much.  Especially if you are hungry, need to drive somewhere or are cold.

Anyone using any common sense at all knew that sooner or later excess demand over supply would exhaust the existing inventories.  This is where the old saying “where the rubber meets the road” comes in.  We are, here and now at this moment about to see “who was correct?”  Will we witness “delivery default” or not?  I suppose that we could see a large deposit (it would be the first one in the last 12 months) and push the event out into the future to the February or April expirations but to what end?  The same end.  All I know is that as it currently stands, this is the very first time as far as I know (including the 1979-80 episodes) that more gold is standing for delivery than the COMEX reports to be available to deliver.  It has taken some 7 months to arrive here after the April and subsequent “ambushes” of price but we have arrived.  Something dramatic MUST happen over the next 30 days.  Either metal arrives into inventory or it doesn’t.  Either metal shows up or the COMEX will default.  This is a pretty simple observation.

Mother Nature has eaten up more and more supply with each successive raid in price.  The Chinese and their brethren have seen the writing on the wall and decided to open their own “arenas.”  “Arenas” that will spurn fractional reserve trading in lieu of CASH ONLY trading and settlement.  We can look forward to a pricing structure that is discovered by a real and free market with no fractional pikers allowed!