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IMF Gold Sales v. the Alchemy of Gold Futures – What’s the Impact on Gold Prices?
The recently announced IMF sale of 191.3 tonnes of their
gold reserves, though it caused an immediate sharp knee-jerk reaction in gold
futures markets, will have a negligible effect on the long-term price of
gold. Here’s why.
In December, 2009 the commercial bullion banks that serve as
agents for the leading Western Central Banks were net short 303,791 contracts
of gold. Each COMEX gold futures contract represents 100 troy ounces, so the
Commercials were net short 30,379,100 troy ounces of gold. With the average
price of gold $1,134.72 per troy ounce in December 2009, this net short
commercial position represented $34.47 billion worth of gold. There are 32,150.74533 troy ounces in
one metric tonne. So 30,379,100 troy ounces/ 32,150.74533 troy ounces = 944.90
metric tonnes of gold. Since gold contracts are supposed to be good for
physical delivery, the commercial bullion banks that were short nearly 38% of
annual world production of gold this past December should have had 944.90
physical metric tonnes of gold in their vaults to back up their short position
at that time. In reality, this situation never exists.
The amount of physical gold that the COMEX delivers on a
daily basis is negligible compared to the massive historical short positions
that have existed for decades. For example, during a two-week span across
January and February, COMEX arranged for the physical delivery of 543,500 troy
ounces of gold with their contracted warehouse depositories, a figure that
represents an average of just 38,786 troy ounces of gold per day. At this rate of daily delivery, it would take the COMEX more than two years
to deliver all the gold represented by the current net commercial short
position should the holders of long contracts ask for settlement in
physical delivery.
Through the use of futures markets, the Commodities Futures
Trading Commission (CFTC) has granted bankers a mechanism to perform alchemy
and turn paper into gold on the COMEX by allowing them to establish obscene
short positions that represent 25% to nearly 40% of annual gold production at
times while simultaneously allowing them to renege on their fiduciary
responsibility to actually physically possess the gold represented by their
short positions. In other words, the CFTC has allowed gold to operate under the
principles of the fractional reserve banking system on the COMEX futures
markets. As I stated above, the net short position of the commercials in gold
represented more than 30 million troy ounces yet for the past few months they
almost never exceeded delivery of 0.2% of their short position on a daily
basis. Many people would refute this argument by stating that COMEX only
delivered a minute fraction of physical gold represented by this obscene short
position because no institution asked for substantial physical delivery of
their long contracts. While it is true that less than 1% of most commodity futures contracts are ever settled by physical delivery, futures markets should not exist to serve the purpose of distorting the underlying reality of supply-demand fundamentals of the actual physical commodity. With gold and silver, this has been the case for decades.
However, the real question should be, “If I asked for
physical delivery of an amount of gold that I should be able to receive, would
I receive it?” Why? If you were India, China or the United Arab Emirates and you wanted to buy 200 tonnes of gold at
the price established in futures markets, but you knew that there was no possible
situation whereby 200 tonnes of gold would ever be delivered to you via the
futures markets, what would you do? Would you buy 200 tonnes of gold in the
futures markets only to know that you would suffer a default of this delivery
and likely be forced to pay a much higher price in the
future or would you try to arrange to buy 200 tonnes of gold NOW from the IMF
or another Central Bank? Of course, you would choose the latter tactic. The
fact that gold cannot be printed out of thin air is the essential quality that
makes gold as a form of money much more sound than the Euro, the dollar, the
Yen or any other form of fiat currency.
However, tens of billions of dollars of gold
exist only in digital form on the COMEX and the CFTC has allowed bullion banks
to indeed achieve alchemy with gold (and silver) in the futures markets. By
allowing these mechanisms to persist that have absolutely zero to do with physical
supply and demand of gold and silver, bullion banks can suppress the price of
paper gold and paper silver in futures markets. But in the end, they will never be able to
perpetually suppress the price of real physical gold and real physical silver. There will come a time when the prices for real physical gold and real physical silver completely sever the already tenuous umbilical cord they maintain to the suppressed prices of gold and silver established by the agent bullion banks of the US Federal Reserve and the Bank of England in futures markets.
As of February 17, the CME warehouse report stated that their
depository warehouses contained 1,645,000 troy ounces of registered gold and
8,292,887 troy ounces of eligible gold. Only two of their depository warehouse
have significant amounts of physical gold worth mentioning, HSBC, with
4,311,493 ounces of eligible gold and 266,677 troy ounces of registered gold;
and Scotia Mocatta with 3,826,013 ounces of eligible gold and 936,855 troy
ounces of registered gold. What does “registered” and “eligible” gold mean? As
in everything bankers do, these terms are meant to confuse the average person.
Central Bankers have used the same tactics to obscure their true holdings of
gold reserves by alternately labeling their gold reserves as Bullion Reserve,
Custodial Gold Bullion Reserve, and Deep Storage Gold, without granting any transparency to
the definitions of their gold stores whenever they arbitrarily reclassify them
with different names.
“Registered” gold is gold that has been assigned ownership
and cannot be sold to another party while “eligible” gold is gold awaiting
registration or delivery. In other words, a large portion of “eligible” gold
may not be eligible at all. Furthermore, there are many questions regarding the
“registered” gold that these depository warehouses hold as to whether multiple
claims exist upon this “registered” gold. Many may say that questioning the validity of "registered" gold is non-justified paranoia, but the historical deceit of bankers justifies our skepticism, not our trust, in them. Just as multiple claims exist upon
every single dollar, Euro, pound and yen that shows up in your savings or
checking deposit bank passbook, I still believe that the gold listed as
“registered” gold may have multiple owners as well (When it comes to the money
in your bank savings and checking accounts, you may have the only claim on the
digital representation of the cash money that exists in your bank savings and
checking accounts, but that digital representation, since it has not yet been
printed in cash, is an abstract concept that exists only in your mind and not
in real life).
Though “registered” gold represents gold that has already
been assigned to someone, unless that physical gold is in your hands, this does
not preclude the fact that bankers may have assigned this “registered” gold to
“multiple” owners no matter what they claim. Remember if one reads the fine
print of the prospectuses of the GLD and SLV paper ETFs, it seems very likely that multiple
claims exist on the physical gold and silver that back both the GLD and SLV
even though the vast majority of buyers of these ETFs believe otherwise.
Last week's Commitment of Traders report indicated that
commercial bullion banks were still net short 21,342,700 troy ounces of gold.
Given the definitions of “registered” and “eligible” gold, and the amounts of
registered and eligible gold that exist in COMEX depository warehouses, it is
obvious that bullion banks short gold with zero intention of ever physically
delivering well over 90% of the gold ounces they short, even though market
mechanisms require them to have the physical capacity and means to do so. Thus, if China, India or any number of
Sovereign Wealth Funds wanted to buy another 1000 tonnes of gold, it would be
physically impossible for them to even partially fulfill this desire (via the futures markets). The
663.83 metric tonnes of gold that are currently represented by the physical
offset of the current net short positions of the commercials that is supposed
to be physically sitting in the vaults of depository warehouses contracted out
by COMEX simply is not there. Furthermore, what is “eligible” for delivery may
not even be eligible, and multiple claims may exist on both “eligible” and
“registered” gold that exists in the contracted depository warehouses.
In the end, the announced IMF sale of 191.3 tonnes of their
gold reserves, though it caused an immediate sharp knee-jerk reaction in gold
futures markets, will have a negligible effect on the long-term price of gold.
The IMF stated that “it would stagger the sales in order not to affect the
markets too much”. However, since sovereign state buyers of gold can not get
anywhere near the tonnage of gold they desire from the futures markets, the
reality is that the IMF could probably dump all 191.3 tonnes on the market in
one month and it would be instantly absorbed by China, India and Middle Eastern
sovereign funds before any other Central Banks that also wants in on the sale
could get their hands on any of it.
More than a year ago, I wrote an article describing the
beginning of a disconnect between gold futures markets in Asia with those in
London and New York, as well as the disconnect between physical gold and silver
prices with the spot prices established in the futures markets in London.
Eventually, due to the fraudulent nature of the gold and silver futures markets
that have nothing to do with the physical supply and demand of the underlying
commodities and everything to do with the desire of the US Federal Reserve and
the Bank of England to suppress gold and silver prices, I believe that this
disconnect will widen until there is an eventual total disconnect between the
AM and PM London Price Fixes for gold and silver and the actual prices demanded
by bullion dealers for real physical gold and real physical silver.
About the author: JS Kim is the Managing Director & Chief
Investment Strategist for SmartKnowledgeU, a niche independent wealth
consultancy company that focuses of helping Main Street formulate investment strategies to avoid and beat
the scams of Wall Street.
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Summary for everybody considering gold.
The one and only thing you do is:
Buy the PHYSICAL METAL & TAKE PHYSICAL DELIVERY.
Everything else will leave you nowhere after the exchanges begin to default and the depending ETFs settle your paper gold on a cash basis with already diluted fiat money.
Gold & Silver ETFs are the biggest SCAM mankind has seen.
Investing in gold means, TAKE POSESSION !
Why not the juniors or explorers? If gold explodes they will have possession of physical gold, and some kind of price discovery mechanism that actually works will eventually come into being.
With at least one possible exception, CEF of Canada.
Question, on PM's houses/ ETF's............
CEF is Canadian, When the SHTF, and we know it will, just not when.
We also know, Canada will do whatever the US asks.(i.e.) we will be outed.
So, exactly how safe is ETF PM's, in Canada, or Zurich, or anywhere?.
WHEN & IF the tits up routine hits, and Sammy wants your metals, where do you store them, how do you convert them, and make use of the reason for owning to begin with?.
If you cannot sell it, what's the friggin point............leave the CONUS, and take it with you before the Ball goes UP?.
Humor a dummie, some of your Brainiacs............(meant as a compliment, and a real question).
Thanks
CEF is nice but I finally sold my position there and bought silver . CEF is the only paper PM I would trade in though
My question is what does it achieve to suppress the price of gold? What the US wants is to devalue the USD slowly to manage their debt load, which would push the price of gold up.
My question is what does it achieve to suppress the price of gold?
Makes the FIAT currencies (Euro, USD, etc) look as though they have more purchasing value. Lower the gold $, the higher the $ and more confidence in paper FIAT.
What the US wants is to devalue the USD slowly to manage their debt load, which would push the price of gold up.
Correct! Actually, right now we are seeing active devaluations from central banksters in FIAT, including the recent Swiss interventions as pointed out by ZH on more than one occasion, as no country wants to have a stronger currencies than another. It hurts import/export. It is also easier to get out of debt if your currency is lower in value as it means physical items value/cost more and thus 'cheaper' to pay off debt.
Gold is a store of value and this is only part of the reason why central bankers hold gold as a physical item on their balance sheets (not diamonds, not copper, not oil, etc)