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Morning Gold Fix: July 12, 2010

Tyler Durden's picture


Commentary courtesy of

Gold gained some ground Friday, opening at 1198.5 and closing at 1209.8, its highest close of the week. The trend seems to be reversing this morning however, as it is down slightly this morning.

The Gold/ Comex Arb : Part 3, The EFP and Pot-Odds

As mentioned in Friday’s comment, Bullion Dealers end up having massive positions in correlated assets in an effort to mitigate risk given them by clients . Their most common  resulting cross-market position is Comex Futures versus cash gold.

Suppose a bullion dealer’s business was almost entirely made up of producers. He would be getting long the cash market from his clients, and selling Comex futures to hedge his flat price risk. He would have a vested interest in the spread between futures and physical as a result. This is expressed in the Exchange for Physical. The EFP is a very liquid spread used for  many reasons. It provides for dealers to reload their open interest guns on Comex, expresses the fungibility between the markets and makes it easier to have liquid environments.

Without getting into too much in this short space right now, to summarize: if a dealer gets a big enough position in the EFP, he must continually roll it out, usually adding to the position through marketmaking to his clients. The EFP is usually not marked to market as 1 leg of it is OTC. It is therefore subject to the same mark-to-myth risk that a CDS is. these positions can get very big. There size can get to the point where a bullion dealer  initiates trades using “Pot-Odds” as his risk measurement, not VaR. One way a bullion dealer could create his own exit strategy from his EFP position is this

Position : Short Comex gold, long OTC swaps against it= Short the EFP

· Wait for the market to trade thinly on Comex, like when the floor closes or between U.S. close and Asia open

· Sell the market sloppily with light volume

· Trigger sell stops

· Buy OTC swaps from another dealer after the dump, or cover shorts when stops go off.

Point is, if you have a huge position and a bigger balance sheet (or lever-ability) than your counterparties do, you are enticed to play the pot-odds game. Wait for your counterparty to be spread thinly. Look for resting stops in yours or another dealers book. Gun for them when no-one is looking. It’s a waiting game for bullion dealers. They put it on, MTM how they want, and wait for an opportunity to game the market for exit purposes. Their bankroll management consists of going to the  Fed window for more money. No real market risk. Too much is determined by the ethics of the individual trader. But in a profit driven culture, errors in judgment quickly become denial, become TBTF, become, “Fuck it, I’m already up to my neck, shoot the moon.”

I know of at least one hedge fund that tried this game with ICE-NMX oil spreads and got killed. The position snowballs while you look for an exit strategy. He didn’t have a balance sheet or a storage facility and had to fudge things for months about his position until it blew up in his face.

What would be interesting is what would happen if GLD were exchangeable in EFP fashion with Comex Gold. We won’t discuss that yet because we are putting on our own spec trade in anticipation of that cross fungibility. But if you are looking to stir up the LBMA , that would do it. GLD would suck up the Comex vaults I think. There would be a lot less metal available for lease. Stay tuned, Google is my friend and I have work to do.

Gold Technicals:  The market remains in a bear turnover, calling for selloffs to weekly retracement support resting at 118090*. Despite Tues-Wednesday’s recovery, trade favors follow through selloffs. We may see corrective action in the low 1200’s, but rallies contained within Tuesday’s range should maintain bear trend forces. A pop over 121510 stops aggressive bear forces, but only a close over 121610 signals for a multi-day recovery. A close under 118090 alerts for selloffs below 1160-.

Silver Technicals: The market remains in a bear turnover and signals for selloffs to drive against the 1723 early June swing low. The bear formation also warns for a larger sliding decline to 16786* weekly support. A drop under Tuesday’s low should release selloffs to 1723. Any corrective rallies will likely be contained to narrow congestion just over 1800. A close over 18321 is needed to boost a sustained recovery to test 18761* resistance. Techs courtesy GRI.

August gold was down 7.2 to $1202.6 per 100 troy ounces as of 7:18 AM EST, this morning. The September U.S. dollar index was up .308 to 84.460. October platinum was down 7.2 to $1526.0 per 50 troy ounces. Silver was down 9.8 cents to 17.975.

-Elizabeth Thawne


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Mon, 07/12/2010 - 09:38 | 464158 JLee2027
JLee2027's picture

The physical market is tight, and the manipulated paper market is where value is fluctuating.  I wish the media would get that right.

Mon, 07/12/2010 - 12:58 | 464466 Johnny Bravo
Johnny Bravo's picture

Yes, people are still paying 100 or 200 an ounce over gold's actual value on the physical market.

It's like paying 50k for a Ford Focus.

Mon, 07/12/2010 - 13:25 | 464513 JLee2027
JLee2027's picture

I said nothing about what people are paying. I said the market is tight.  Try finding 10 tons of Gold, PHYS can't.

And yes, Johnny, your still an idiot.

Mon, 07/12/2010 - 13:26 | 464518 Johnny Bravo
Johnny Bravo's picture

And "your" unable to speak English at above a third grade level!

I should definitely trust your investment advice though...

Mon, 07/12/2010 - 13:37 | 464542 RockyRacoon
RockyRacoon's picture

Ad hominem reply.  Up to your high levels as usual.

Mon, 07/12/2010 - 13:43 | 464548 Johnny Bravo
Johnny Bravo's picture

Sorry, I believe that people should be able to speak at a third grade level before offering investment advice.

I know that certain PM investors lack this kind of criteria...

Mon, 07/12/2010 - 15:15 | 464761 JLee2027
JLee2027's picture

I didn't give any investment advice, other than avoid the phony paper market.  But Johnny B., who knows his grammar (sp) is an idiot.

Mon, 07/12/2010 - 16:38 | 465023 Johnny Bravo
Johnny Bravo's picture

Yes, we should avoid paper assets altogether.

Hey, you want to give me all of your "fiatscos?"

I mean, they're worthless, right?

I'll even give you some overpriced gold.

Tue, 07/13/2010 - 01:29 | 465807 JLee2027
JLee2027's picture

I didn't say that. Once again you just your own words in my mouth and wanna pretend it means something.  Since you are a shithead muther fucker liar it means squat.

Mon, 07/12/2010 - 13:03 | 464474 EdwardTeach
EdwardTeach's picture

The phisical market is about to loosen up. 380 tones of physical gold bullion was sent to the Bank of International Settlements in return for foreign currencies. What will all this physical gold do to the price, and most importantly who has this much physical gold to sell and why would they be trading it for worthless Fiat Dollars? Good Luck.

Mon, 07/12/2010 - 13:10 | 464489 Johnny Bravo
Johnny Bravo's picture

"why would they be trading it for worthless Fiat Dollars?"

Hint: because it's overvalued.

Also, if fiat dollars are worthless, I'm willing to take any extra fiat dollars from any of you genius goldbugs.

Mon, 07/12/2010 - 13:31 | 464529 GoinFawr
GoinFawr's picture

If Au is worthless, I'll gladly take any extra gold from any of you 'genius' paper dupes. Hell, I'll even offer you some of your precious FIAT in exchange; I assume in a show of confidence you will offer it to me at a price well below spot... Ta, in advance.

Mon, 07/12/2010 - 13:41 | 464547 Johnny Bravo
Johnny Bravo's picture

I'll sell you all the gold you want right now at 1350 an ounce.

Just think, you'll make 48650 an ounce in three weeks when we become Zimbabwe!  Any takers?

Mon, 07/12/2010 - 13:49 | 464553 GoinFawr
GoinFawr's picture

1350? Well, so much for your confidence in the value of Toilet Paper...

Mon, 07/12/2010 - 13:50 | 464560 Johnny Bravo
Johnny Bravo's picture

It's not "toilet paper" that's overvalued.  It's gold.

Mon, 07/12/2010 - 13:54 | 464571 GoinFawr
GoinFawr's picture

oh, Snap!

Mon, 07/12/2010 - 13:55 | 464575 Johnny Bravo
Johnny Bravo's picture


Mon, 07/12/2010 - 13:24 | 464515 JLee2027
JLee2027's picture


The phisical market is about to loosen up. 380 tones of physical gold bullion was sent

Ancient news. Those 380 tons were sold into the market months ago.  And learn to spell.

Mon, 07/12/2010 - 13:27 | 464520 Johnny Bravo
Johnny Bravo's picture

This, of all people, telling people to learn to spell.

YOUR a bad speller, JLee!  LOL

Mon, 07/12/2010 - 15:16 | 464766 JLee2027
JLee2027's picture

My message is correct, and yours is worrying about spelling and grammar on a Gold board. Think about that you idiot.

Mon, 07/12/2010 - 16:40 | 465026 Johnny Bravo
Johnny Bravo's picture

First, this isn't a "gold board."

Next, your message is still incorrect.

All that leaves you with is ignorance and poor grammar.

Mon, 07/12/2010 - 09:44 | 464163 Internet Tough Guy
Internet Tough Guy's picture

Articles like this reinforce my dislike of paper trading.

Mon, 07/12/2010 - 10:30 | 464206 mephisto
mephisto's picture

Fair enough, but I thought it was an excellent summary & good technicals. I've been reading around on this BIS/GLD situation, and I'm still unsure WTF is happening. Opinion is divided on whether it ends up as catalyst for a crash or a spike. Roll your dice....

Mon, 07/12/2010 - 11:13 | 464257 Max UK
Max UK's picture

Maybe a crash would naturally be followed by a spike.

Without professing any great knowledge as to how the market might be rigged, I am trying to see it from the viewpoint of the riggers. If they crash the paper price too much, they risk opening the gates to pent up demand for physical. I imagine that one major objective of the paper price, is to use it deter physical demand. If true, then a very gentle, long term decline in the paper price, might be their aim. It would encourage potential buyers to keep deferring their purchase, and thereby set up a self-reinforcing spiral in which demand is perpetually deferred.


Of course, whether the riggers can achieve this is another matter entirely. They are playing with fire, if they are indeed running out of physical.

Wed, 07/14/2010 - 07:50 | 464299 CIABS
CIABS's picture

"If they crash the paper price too much..."

perhaps the main thing being traded on COMEX is the continuing functionality of the COMEX itself as the price-setting, i.e. price-suppressing, tool.  when will they decide to break the tool?  is it time yet?  i don't know.  until it is, however, the game is to bend but not break the COMEX.

Mon, 07/12/2010 - 09:51 | 464167 LoneStarHog
LoneStarHog's picture

I am going to start a Housing Futures Market, which will allow PAPER in UNLIMITED QUANTITIES with NO PHYSICAL HOME backing the paper to determine the VALUE of housing.

So, Joe & Josephine Numnuts, if you have a $250,000 home and my PAPER HOMES state otherwise, let's see if you SQUEAL like a stuck pig.

Mon, 07/12/2010 - 10:21 | 464192 Sherman McCoy
Sherman McCoy's picture

seems like the more salient issue is to buy gold and take delivery. At some point, we are going to have the mother of all short squeezes.

Mon, 07/12/2010 - 11:44 | 464298 JLee2027
JLee2027's picture

Not if Crimex declares force majuere, that's voids any requirement for the shorts to be covered. No short squeeze, but a mass realization that physical is needed instead of paper.  The physical market could go up 50x overnight,according to Jesse's Cafe.  Same result, but different way and evil JP Morgan stays afloat.

So, avoid GLD and SLV - they are a disaster waiting to happen.

Mon, 07/12/2010 - 14:05 | 464597 GoinFawr
GoinFawr's picture

Indeud. Let's let 'em know the jig is up and watch 'em shit their naked shorts.

Mon, 07/12/2010 - 16:25 | 464980 Strider52
Strider52's picture

I wonder how many COMEX investors actually get physical delivered. I've heard it takes a ton of work by a dealer (and they hate doing it), and you still have to wait quite a while. Either that, or you get a tempting pile of paper GLD shares, which are of dubious value also. But I suppose something is better than nothing.

  You can't crash the CRIMEX. They do NOT have to deliver London Good Delivery (or whatever they call it). They changed the rules a couple of years ago, I think.

Wed, 07/14/2010 - 10:38 | 468046 GoinFawr
GoinFawr's picture

GLD/SLV shares might seem tempting at first glance, but upon closer inspection are likely just an excellent weapon for shooting yourself in the foot. That is hardly 'better than nothing'. I mean it is at the very least a conflict of interest to give money to a company that holds some of the largest short positions against the PM's you are long, no? And it is much, much less complicated to get delivery from the Comex than it is from those BS etf's.

Here's your link to track: 

'Failure to deliver' can best be described by the word 'Default'.




Mon, 07/12/2010 - 12:38 | 464405 Johnny Bravo
Johnny Bravo's picture

No wonder this article got low marks.  It tells the truth about gold's high prices and bearish technicals.

That does not coincide with targets of gold at 50000 an ounce.  *snicker*



Mon, 07/12/2010 - 12:41 | 464416 JLee2027
JLee2027's picture

And your obviously still an idiot.


Mon, 07/12/2010 - 12:52 | 464452 Johnny Bravo
Johnny Bravo's picture

"And your obviously still an idiot."

Deeeerrrrnhhh... I'm so much smarter than you I can't use the words your and you're correctly!

But yeah, I'm a genius... and YOUR not.

*counts my 1350 an ounce maple leafs*

See, paying 150 dollars extra over market price makes me SMART, not stupid...

Mon, 07/12/2010 - 13:26 | 464521 JLee2027
JLee2027's picture

And yes, Johnny, your still an idiot.

And let me add:  WHOOSH.

Mon, 07/12/2010 - 13:28 | 464525 Johnny Bravo
Johnny Bravo's picture

How does your inability to spell or use words in a sentence correctly say anything about me?

Oh wait, it doesn't.  WHOOSH.

Mon, 07/12/2010 - 15:18 | 464773 JLee2027
JLee2027's picture

I'm not here to talk about English composition skills.  Buy physical Gold and avoid the phony paper market which Johnny Briandead represents because he's an idiot.

Mon, 07/12/2010 - 16:42 | 465035 Johnny Bravo
Johnny Bravo's picture

Yes, Johnny Briandead only made 70% this year trading paper.

How much has holding physical gold made you this year?

1220-1200 = 20/1220 = a LOSS of .6%

Damn.  I'm sure glad I made 70% betting on paper.

And yet, the only thing you will be able to trade your gold for is paper!

Wow, what a hypocrite.  You preach against buying paper assets, because you hope to trade your hard assets for paper at a later date.
And yet you're still down on your investment.

Mon, 07/12/2010 - 20:31 | 465470 GoinFawr
GoinFawr's picture

"And yet, the only thing you will be able to trade your gold for is paper!"

Stupidest comment you've made yet JB, and that is saying something.

Tue, 07/13/2010 - 01:28 | 465805 JLee2027
JLee2027's picture

You a moron Johnny Braindead and haven't made a nickel except by lying and stealing, which is what you were born to do.  Ain't that right now sugar?

Mon, 07/12/2010 - 12:38 | 464406 Grand Supercycle
Grand Supercycle's picture


XAUEUR / XAUUSD / XAUAUD: daily chart bear signals and weekly chart bear signals continue.

Monthly charts (ie the long term trend) remain bullish.

Mon, 07/12/2010 - 12:56 | 464460 Johnny Bravo
Johnny Bravo's picture

I'm sorry to cause conflict by agreeing with the article.  In the interest of making friends here, I have offered the following reply.

I know that when the U.S. becomes Zimbabwe, fiat will fail, gold will be the only currency, and I'll be hiding under my front porch eating canned ham and waiting for Weimar Germany to occur.  Gold is shiny, pretty, and I can hold it in my hand.  Therefore, since it's the only real money, it will be 50 bajillion an ounce by three weeks from now!

GOLED BITCHEZ!!!!!!  When it hits 25000, I think all of us zerohedgers should get together and eat green cheese from the moon brought by martians.  (paraphrases akak)

Mon, 07/12/2010 - 12:59 | 464469 Johnny Bravo
Johnny Bravo's picture

I am not chumbawumba.  My head is outside the walls of my anus.

Mon, 07/12/2010 - 13:28 | 464523 JLee2027
JLee2027's picture

That's only because something else is stuck up your anus idiot.

Mon, 07/12/2010 - 13:29 | 464527 Johnny Bravo
Johnny Bravo's picture

Is it interesting to be able to watch yourself poop as you come up with investment ideas?

Mon, 07/12/2010 - 15:20 | 464777 JLee2027
JLee2027's picture

I wouldn't advise you do that, shit for brains.

Mon, 07/12/2010 - 16:44 | 465039 Johnny Bravo
Johnny Bravo's picture

I know.  Only certain "rarified" gold investors can make such enlightened calls without taking their heads out of their asses.

I can't possibly compete with that kind of skill.

Tue, 07/13/2010 - 01:33 | 465812 JLee2027
JLee2027's picture

Ok Johnny Braindead, hear this now.

I will never, on any forum at ZH, reply to you again.  And since you a one-armed troll with dead brain cells that one little decision of mine is gonna hurt you more than you can imagine. You need to feed off people like me to live, but now you can't anymore.  BOO HOO!

So go right ahead you troll POS, tempt me. And when I don't respond to you, no matter what, you'll know who wears the pants here and who wears the skirt (and that would be you ahole).  BYE BYE!

Mon, 07/12/2010 - 16:42 | 465036 zaknick
zaknick's picture

Barely, yet the rest of you is obviously still asshole-encased.

Mon, 07/12/2010 - 13:41 | 464546 RockyRacoon
RockyRacoon's picture

Ok.  Thanks to JB the comments section has deteriorated as usual.

Moving along to the next ZH article.... bye.

Mon, 07/12/2010 - 13:44 | 464551 Johnny Bravo
Johnny Bravo's picture

Maybe you can try your tripe at Mish's, where your comments also add nothing interesting or relevant to the discussion.

Mon, 07/12/2010 - 17:49 | 465160 DosZap
DosZap's picture

And now for the TRUTH for the DROP..........

FROM THE MAN.........

Pay attn, to Mr. Sinclairs insight.

Thu, 08/19/2010 - 10:56 | 530325 herry
herry's picture

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