SocGen: "Physical Gold Squeeze Returns"

Tyler Durden's picture




 

We already highlighted the return of gold lease rates to subzero yesterday, during the dramatic spike in gold following Gartman's latest sell recommendation. Now, it is time for the banks to also begin admitting that, as SocGen has just pointed out, the gold "physical squeeze returns."

Why is this relevant? First, we present SocGen's explanation of how in a world of ever greater quality asset scarcity, gold remains at the pinnacle (or bottom of Exter's pyramid), central banks have had to forge agreements among themselves to constant lease and re-lease the gold in circulation to each other, to have backstops for when demand is so high that the actual underlying physical is simply not enough:

Western central banks have more than a decade-long history of gold Agreements with each other and with the private sector. The Central Bank Gold Agreement (also known as the Washington Agreement on Gold) was announced on September 26, 1999. It followed a period of increasing concern that uncoordinated central bank gold sales were destabilising the market, driving the gold price sharply down. The third Central Bank Gold Agreement (CBGA3) currently in force covers the gold sales of the Eurosystem central banks, Sweden and Switzerland. Like the previous two Agreements, CBGA3  covers a five-year period, in this case from 27 September 2009 (immediately after the second Agreement expired) to 26 September 2014. The third Central Bank Gold Agreement reaffirmed that "gold remains an important element of global monetary reserves", as was stated in the two previous Agreements.

 

In both the previous Agreements, signatories undertook not to increase their activities in the derivatives and lending markets above the levels of September 1999, when the first CBGA was signed. The new Agreement includes no similar commitment, although central bank activity in these fields has been very limited in recent years.

In other wodrs, despite all the posturing, gold is not only money, but the most important money central banks have access to for one simple reason: they can't create it out of thin air. More importantly though, as part of a possible new Central Bank Gold Agreement, as SocGen notes, it appears gold derivative and lending activity is about to take off courtesy of the elimination of the Washington Agreement limitations.

So what may be included in the new agreement once the CBGA3 expires in September 2014? SocGen explains:

The CBGA is likely to be a topic of increasingly intense debate over the coming twelve months; we suspect that a renewal is on the cards, if only for the sake of best practice. The CBGA covers not only sales, but lending arrangements. With the gold hedge book now below 200 tonnes, there is clearly scope for the banks to start lending again should there be any requirements from the mining sector. There is increasing debate about the possible re-emergence of hedging in the next few years, but thus far there is little evidence of any great intent. As the gold price trends lower, gold producers become more likely to hedge in order to protect their declining margins.

But that's some time in the future. As for the present, well - listening to 5 minutes of financial TV is enough to convince anyone that everyone hates gold: after all it's lost its momentum. So what do to?

If anything is guaranteed to send the gold price higher it is likely to be the fact that the majority of delegates at the recent annual conference held by the London Bullion Market Association and the London Platinum & Palladium Market were bearish for gold in the short term. The general consensus was that the flurries of very strong private purchasing in April and again in June-September was now on the wane and that a degree of increasing confidence in the global economy pointed to reduced interest among professional investors.

As for central banks:

The official sector remains a buyer. The panel of central bankers that addressed the conference included The Banque de France, the Deutsche Bundesbank and the Central Bank of Argentina. What was particularly interesting was that, when questioned, the representatives of both the Banque de France and the Bundesbank were uncommunicative about the prospects for a further Central Bank Gold Agreement (the third – known as CBGA-3 - expires on 26th September next year; see blue box below for further details). The Deputy Head of the Market Operations Division at the Bundesbank refrained from any comment on “this very sensitive issue”, while the Director of the Market Operations department at the Banque de France said that there were “many many issues” to be considered. Delegates, on the whole, were of the view that the Agreement should be rolled over, otherwise the markets could easily become unsettled, given the heavy holdings in the hands of a number of European banks in particular, notably those with legacy holdings from the days of the Gold Standard.

And of course, there is always China.

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Fri, 10/18/2013 - 12:35 | 4069186 knukles
knukles's picture

So when do we get to say it's "officially" no longer a Conspiracy Theory?

Fri, 10/18/2013 - 12:45 | 4069222 Enslavethechild...
EnslavethechildrenforBen's picture

Don't think anyone actually needs to make it official...

Fri, 10/18/2013 - 12:50 | 4069256 BaBaBouy
BaBaBouy's picture

PAPer GOLD Market Is A Scam And Fraud, No???

Fri, 10/18/2013 - 12:54 | 4069268 Pinto Currency
Pinto Currency's picture

In 2013, the Shanghai Gold Exchange has averaged 41.7 tonnes of physical bar gold delivery per week.  That's 1.34 million oz. per week.

They are headed over 2,000 tonnes on the year - now wonder the Germans are reticent.

Good luck using old tools to trick the market when everyone is increasingly awake.

Check the delivery numbers:

http://koosjansen.blogspot.ca/2013/10/week-41-shanghai-gold-exchange-physical.html

 

Fri, 10/18/2013 - 13:03 | 4069309 ZerOhead
ZerOhead's picture

"physical gold squeeze returns."

I return to squeeze my physical gold whenever the urge arises....

Fri, 10/18/2013 - 13:25 | 4069377 Pinto Currency
Pinto Currency's picture

 

Maguire re. LBMA activity:

 

Last Friday as we were headed into the lows I reported a major sovereign ‘spot purchase’ to KWN. Remember, we said it was about 90 tons being accumulated, some of it at $1,270. You and I were literally speaking on the phone as gold was making the lows. But that sovereign order had been patiently waiting for weeks and it finally filled.

These trades fly under the radar sometimes because they are initially just a foreign exchange trade, and it’s just part of a major paper gold shuffle in London every day. But it’s only when these paper gold buyers have the audacity to turn up at a PM fix in London and demand the physical gold that alarm bells are triggered.

The bullion banks are then forced to buy at market to fill these orders, and there is no bullion bank I know that can turn up that kind of supply overnight. That’s why we saw 1 - 3 month GOFO rates spike negative once again mid-week. As these orders stood for delivery as it actually forced gold into backwardation again. And it’s going to happen each and every time the gold price is now pushed lower.

So, this is an underpinning that paper traders simply don’t understand. We are actually talking about the cash value of gold vs futures being at a premium. China is going to continue to milk this discount window. They are continuing to exchange dollar reserves for gold, without directly disrupting Treasury and gold prices. But we are now very, very close to the point where China is the gold market.

The Chinese, through Shanghai, have already absorbed the bulk of all global mine production, if not all of it in its entirety. In July alone, Shanghai gold imports exceeded all of the imports for 2012. We also know that official Shanghai gold deliveries have accelerated since that time...

...The Chinese don’t care what Goldman Sachs or any other brokerage shills says about gold.  They are focusing on building their savings, real wealth, according to age-old ideas, and with a state-sanctioned 20% savings rate invested in gold.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/10/18_Maguire_Predicted_Gold_Surge_-_Now_Says_West_Is_Collapsing.html

Fri, 10/18/2013 - 13:48 | 4069509 outamyeffinway
outamyeffinway's picture

So gold is being hammered over the last couple years to FORCE the industry to hedge their gold and sell it forward to central banks. Goddammit. If ANY of my miners hedge thier book I'm selling them immediately. Fuck ALL!!!

Fri, 10/18/2013 - 14:09 | 4069616 cosmyccowboy
cosmyccowboy's picture

i wished i could squeeze mine every once in a while but i took it down the river instead...

Fri, 10/18/2013 - 12:55 | 4069283 DoChenRollingBearing
DoChenRollingBearing's picture

Roughly speaking, the 170,000 tonnes of gold out there works out to about 1 oz per person in the world.  If we posit that Americans have (approx.) 10 x the wealth of the average on our planet, then each American should own 10 oz...  Each family (call it three) then should own 30 oz.

Yet how many US families own 30 oz?  Not many...

And all those 8100 tonnes of gold owned by the Treasury?  If you don´t have it in your physical possession, you don´t own it.

Fri, 10/18/2013 - 13:03 | 4069314 Grande Tetons
Grande Tetons's picture

You only have to hold a kilo bar or coin once to know that you are holding wealth. 

 

Today, one could buy a nice suv or a kilo bar for about the same price. We all know what the SUV will be worth in 10 years....the bar....who knows? 

Fri, 10/18/2013 - 14:12 | 4069630 Jam Akin
Jam Akin's picture

When my son was 7 years old he asked me "How much gold would it take to buy a Hummer?"  Great question and great way to teach basic economics to him at the time...

Fri, 10/18/2013 - 14:48 | 4069755 akak
akak's picture

 

"How much gold would it take to buy a Hummer?"

If you happen to be the CEO of a major corporation asking this question of a congressman, the answer is not very much at all.

Fri, 10/18/2013 - 17:01 | 4070202 Jam Akin
Jam Akin's picture

That transaction would be more readily settled in fiat.  But probably not in a Fiat.

Fri, 10/18/2013 - 13:15 | 4069368 YC2
YC2's picture

25-30oz was the threshold for good happy success I got from a few calcualtions and assumptions during some down time at work the other day by comparing wealth levels in financial assets of the 1% as a multiple of the average to average non-CB gold out there per person.

 

Two short planks puts 20oz per $1M equity to hold your wealth post-transition, I believe.  I am not sure how this would square with his $135k/oz figure.

 

Either way, I think 30oz is a good number to shoot for by overweighting allocation at the beginning, then scale up as a smaller % of your portfolio.  

 

All I know is the Indians will be killing it if any of these "transitions" come to pass.

Fri, 10/18/2013 - 13:18 | 4069380 NIHILIST CIPHER
NIHILIST CIPHER's picture

Do Chen,     As you well know,Amerikans do not own GOLD.   I had some GOLD ( not paper) but was cursed by the misfortune of a boating accident.        

Fri, 10/18/2013 - 13:41 | 4069477 Tall Tom
Tall Tom's picture

I had GOLD and a Boating Accident too. It must be a curse.

Fri, 10/18/2013 - 15:24 | 4069888 Pool Shark
Pool Shark's picture

 

 

For me, it was a hot-air baloon incident.

Sadly, we had to jettison everything heavy to stay aloft while we were traveling over a large body of water...

 

Fri, 10/18/2013 - 13:51 | 4069527 King_Julian
King_Julian's picture

A little known fact is that ZH serves as a support group for this all too common loss. Thank you brother, for sharing. I too feel the pain and I mourn with you. The only thing I can recommend is try again. Sooner or later you will make it to the other shore with your ounces. Don't give up, no matter what!

Fri, 10/18/2013 - 12:55 | 4069257 Pinto Currency
Pinto Currency's picture

.

 

 

Fri, 10/18/2013 - 12:58 | 4069299 Canadian Dirtlump
Canadian Dirtlump's picture

just like in broader politics, they will continue to provably, knowingly lie to anyone and everyone, then blame somebody else  when the shart finally hits the fan.

 

AS to the manipulation / bogus selling - at this point I'm starting to think until we see a proper colapse in production, things will muddle by as they have been.

Fri, 10/18/2013 - 12:37 | 4069191 LawsofPhysics
LawsofPhysics's picture

As I stated earlier.  The "redline" (ironic I know) has been crossed.  85 billion in direct monetization is no longer enough to levitate equities, suppress PMs, and put a bid under bonds.  The situtation is similar for all central banks on earth.  Just wait for "unexpected" and "emergency measures" from a "co-ordinated" central bank effort to be initiated shortly.  Hopefully ZH will pick up on it, because there will be no way this will be announced.

Fri, 10/18/2013 - 12:41 | 4069216 fonzannoon
fonzannoon's picture

Laws, I agree with you in principle. But the last 3-4 gold rallies have barely lasted 1 day. Literally 24 hours and it's time to short. Equities continue to blast through all time highs and now we have yields falling pretty fast on top of it.

I see all three of those things still occuring. I'm playing along and looking for any signs of trouble. I am sure I will get smashed if it happens. But I think we may have a ways to go.

Fri, 10/18/2013 - 12:48 | 4069246 greatbeard
greatbeard's picture

It's all perception now, including gold.  Stocks up, gold down, times are good, until they aren't.  Who knows when that until gets here.  Like you've pointed out many times, look at Japan.  This economic carnival can, and probably will, go on longer than any of us will be around.

 

 

Fri, 10/18/2013 - 12:51 | 4069259 drooley
drooley's picture

yeah times like this you need confidence, conviction, and patience.. you can be wrong hundreds or thousands of days in a row before you're finally proven right.

Fri, 10/18/2013 - 13:20 | 4069374 Tinky
Tinky's picture

"This economic carnival can, and probably will, go on longer than any of us will be around."

Myopic nonsense. There is no chance that TPTB can avert a major crisis for more than a few years, and it is likely to arrive sooner (i.e. <2 years) than later (3-5).

There are numerous indications that control is being lost already, the decreasing effectiveness of the gold surpression scheme being just one example.

We'll almost all be around to experience the impending crisis, and it can't come a moment too soon.

Fri, 10/18/2013 - 13:43 | 4069439 Ham-bone
Ham-bone's picture

Tinky - don't mean to be harsh but what planet are you on???  "control is being lost already, decreasing effectiveness of gold suppression"???  WTF?  While stawks go straight up, money printing remains in overdrive, and gold/silver remain moribund. 

Sorry, but there is a very good chance TPTB can avoid whatever they want to avoid.

Plus, consider what happens if China is bought off by TPTB to accept Taiwan and some greater sphere of control in asia, or oil resources, water, etc. for slowing down or stopping purchases of gold. 

Chinese commitment is to their maintenance of power, not to a rising gold price.  Try not to get too myopic.

Fri, 10/18/2013 - 13:45 | 4069490 Tinky
Tinky's picture

So, when the COMEX defaults, TPTB will remain firmly in control, eh? 

Oh and good luck with your theory that the U.S. will  be able to bribe China into reversing the very policy that serves as a solid foundation for its growing economic power.

Fri, 10/18/2013 - 13:53 | 4069500 Ham-bone
Ham-bone's picture

Tinky - I don't know anything for sure...I only try to figure out the likelihood of things.  Suggest you likewise see there are no sure things.

In '09, I would not have guessed the US could increase it's debt by $7 T, lower it's total interest paid (not just rates but actual lower total paid), the dollar would remain stable, and commodities would remain stable...defies logic but that's the point.

Fri, 10/18/2013 - 13:47 | 4069503 Ham-bone
Ham-bone's picture

dup

Fri, 10/18/2013 - 20:26 | 4070835 MeelionDollerBogus
MeelionDollerBogus's picture

Moribund? Supplies are being sucked up faster than ever before.
Paper price isn't the issue, it's the failed trick to get people to avoid gold with a lower price. It isn't working.

Fri, 10/18/2013 - 20:28 | 4070839 MeelionDollerBogus
MeelionDollerBogus's picture

It's the failed trick of getting people to dump gold on a price drop. Tinky's right

Fri, 10/18/2013 - 13:39 | 4069470 greatbeard
greatbeard's picture

>> Myopic nonsense.

Well, we are all entitled to our opinions.  Time will tell who was the victim of myopia and what was nonsense. 

> There is no chance that TPTB can avert a major crisis for more than a few years,

If that's the case, have you begun liquidating everything and getting yourself set up in a crash-stead?  Have you begun honing your gardening and husbandry skills?  Have you pulled out of all establishment ties and gone underground?  If not you don't believe in your projections either.

>> There are numerous indications that control is being lost already,

Rome had the same symptoms for a couple of hundred years.

>> the decreasing effectiveness of the gold suppression scheme

Ineffective? Are you daft?

>> it can't come a moment too soon.

I try to avoid insults but you are a blithering idiot if you are really hoping for a major crisis.  I can only assume you are smug, living in your cave, far far away from anyone else, with no loved ones who would suffer.

Fri, 10/18/2013 - 13:51 | 4069522 Tinky
Tinky's picture

To imagine that the analogy with the fall of the Roman Empire is taut in every respect is remarkably naïve given the extraordinarly different contexts.

With regard to hoping for a crisis, I'll keep it simple. Either you believe that a major crisis is inevitible, or you don't. If the former, then a clear and powerful case can be made that the sooner it arrives, the better for almost all involved. If the latter, then I would suggest that you will be in for a rude awakening. 

 

Fri, 10/18/2013 - 14:17 | 4069652 DosZap
DosZap's picture

It's all perception now, including gold.  Stocks up, gold down, times are good, until they aren't.  Who knows when that until gets here.  Like you've pointed out many times, look at Japan.  This economic carnival can, and probably will, go on longer than any of us will be around.

 

You sir are correct, but the entire global system was not in the shape Japan has been in, like it basically is now, or soon will be.

Fri, 10/18/2013 - 12:56 | 4069291 Enslavethechild...
EnslavethechildrenforBen's picture

Does anyone care to guess how long before China resumes using the Gold Standard?

Fri, 10/18/2013 - 13:04 | 4069323 LawsofPhysics
LawsofPhysics's picture

as soon as they don't need to export anything.  Not before.

Fri, 10/18/2013 - 13:02 | 4069310 LawsofPhysics
LawsofPhysics's picture

Exponential equations are a bitch as more paper has to be printed to settle the gold claims...

Eventually confidence is lost, trade stops, and the big fish and countries start demanding to settle current accounts in anything real (oil, corn, rice, wheat, natural gas, whatever).   once that happens, there will be none of those commodities available for "the average joe". This can happen pretty quickly.  At that point, having something to barter will be more important.  Just ask any Russian who was in their "earnings prime" in 1989.  We are on the same path.

Fri, 10/18/2013 - 14:14 | 4069635 DosZap
DosZap's picture

Just like the MAN said, there will be severe UNSEEN by most consequences to this.

 

Posted October 17th, 2013 at 11:57 AM (CST) by & filed under In The News.

Jim Sinclair’s Commentary

This will impact Chinese utilization of the downgraded debt. It is not without meaningful consequence.

Chinese agency downgrades US credit rating
17 October 2013 – 11H37

Fri, 10/18/2013 - 12:47 | 4069238 Possible Impact
Possible Impact's picture
Just wait for "unexpected" and "emergency measures" from a "co-ordinated" central bank effort to be initiated shortly.  Hopefully ZH will pick up on it, because there will be no way this will be announced.
Guest Post: Is A Large Wealth Grab On The Way?

http://www.zerohedge.com/news/2013-10-18/guest-post-large-wealth-grab-way

Fri, 10/18/2013 - 12:38 | 4069208 observer007
observer007's picture

 

This is why the buy gold like hell

China wants GOLD STANDARD:

http://homment.com/China-Gold-standard

Fri, 10/18/2013 - 12:48 | 4069245 jo6pac
jo6pac's picture

Yep, I keep reading were the banks are trying to get gold down to $1050 to cover bets from the pass. I know what little money I have, I'll be buying again. I bought at $647 so feel OK but would buy more.

Fri, 10/18/2013 - 12:57 | 4069295 Quinvarius
Quinvarius's picture

They need to replace actual pilfered and leased gold.  They will never get what they need at that price.  Even if they bought contracts enough to cover it, the gold is not in the market.  They get that gold one way, and one way only, bid it up until there is actual supply. 

Fri, 10/18/2013 - 13:48 | 4069508 lakecity55
lakecity55's picture

It's time again to say,

Gold, Bit-Chez!

Fri, 10/18/2013 - 12:54 | 4069271 mick_richfield
mick_richfield's picture

I think it's more than China.

The human race wants the gold standard,

because the human race is tired of being enslaved.

By monsters.

 

Fri, 10/18/2013 - 12:58 | 4069303 Enslavethechild...
EnslavethechildrenforBen's picture

Why don't we the people agree on a date and just start using metal? What's stopping us?

Fri, 10/18/2013 - 13:02 | 4069317 LawsofPhysics
LawsofPhysics's picture

a shortage of the physical metal.  Duh.

Fri, 10/18/2013 - 13:52 | 4069532 Toolshed
Toolshed's picture

You are mistaken LawsofPhysics. The forms of exchange could be any combination of not easily sourced metals. These could include gold, silver, copper, nickel, platinum, palladium, etc. The denomination sizes could be adjusted to meet demand. Such as ounces, grams, and fractions thereof. Not a problem of quantity, but a problem of logistics and desire.

Fri, 10/18/2013 - 13:53 | 4069537 Tall Tom
Tall Tom's picture

There is no shortage of Metal. There are 170,000 Tons. There is enough for roughly 3/4 Troy Ounce for every Man, Woman, and Child on the Planet.

 

That is not a shortage.

 

There may be a shortage of will. There may be a shortage of accumulated savings in Currency that can be used to acquire Gold. Many live on a sustenance income and cannot afford to store discretionary wealth.

 

There is not a shortage of Gold. I owned well over 10 times my share until that unfortunate Boating Accident happened. I had not planned on giving it away. I had planned that people can work for me and work for it.

Fri, 10/18/2013 - 13:46 | 4069496 Toolshed
Toolshed's picture

We seem to be genetically programmed to not cooperate with each other. Most think the story of the Tower of Babel was just a myth or parable. After researching numerous versions of the story from differing cultures and observing human behavior, I am not so sure. The part about creating numerous different languages so we can't understand each other is obviously invalid, since that is not really much af an obstacle. However, for whatever reason, groupings of humans simply refuse, under any cicumstances, to cooperate with each other in a real meaningful way for any extended period of time. This "trait" has prevented humanity from achieving "god like" accomplishments sucjh as defeating illness, poverty, inequality, or escaping from this planet and colonizing other bodies. The latter being much more significant than most realize, since it is absolutely inevitable that at some point in the future the Earth will be impacted by a extinction level foreign body. Sad, but we are our own worst enemy.

Fri, 10/18/2013 - 14:06 | 4069607 King_Julian
King_Julian's picture

I can't think of a better trait to ensure survival of at least a portion of the speciesin the face of some catastrophie. The lemming-like trait you long for would have destroyed humanity long ago. Some huge collective project requires a leader right? Our track record with that has been a disaster due to our built-in imperfections. The "glitch" in the Matrx is a good thing. Godliness might be found in other, less grandiose endeavors. Progressive collectivist ideas=suck.

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