Physical Gold Shortage Goes Mainstream

Tyler Durden's picture




 

While the topic of rehypothecation and the shortage of physical gold is well covered here at Zero Hedge (and the ever-changing COMEX gold vaults' inventories), it appears the concept of the exploding "leverage" or default risk of the COMEX has now hit the mainstream media. As BNN reports, veteran trader Tres Knippa, pointing to recent futures data, says "there may not be enough gold to go around if everyone with a futures contract insists on taking delivery of physical bullion." As he goes on to explain to a disquieted anchor, "the underlying story here is that the people acquiring physical gold continue to do that. And that’s what is important," noting large investors like hedge fund manager Kyle Bass are taking delivery of the gold they're buying. Knippa's parting advice, buy physical gold; avoid paper.

 

One of the problems...

That won't end well...

And the excellent summary from a veteran trader:

 

Knippa warns that if 1 entity asks for delivery of a position-limit-size long in gold, it will absorb 81% of COMEX's inventory... and if 2 entities were to do so... COMEX has a problem...

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Sat, 01/18/2014 - 19:22 | 4344776 localsavage
localsavage's picture

Selling something that you don't have is a crime right???????

Sat, 01/18/2014 - 19:32 | 4344784 GetZeeGold
GetZeeGold's picture

 

 

 

Not if you're Jon Corzine.

 

Pretty hard for someone to sell your gold if you have it in your hand however. If you don't hold it....you don't own it.

Sat, 01/18/2014 - 19:40 | 4344805 Say What Again
Say What Again's picture

You guys are confusing the physical gold from the futures contract.

If I buy a gold futures contract, I am buying a contract from a counter-party that promises to deliver a certain amount of gold at some time in the future for a specified price.

So the thing being sold is a contract, not the gold.  The aggregate nominal value of all the gold futures can, and does, exceed the physical supply most of the time, because at expiration, many of the contract cancel out (e.g., long against short).

COMEX limits the size of a single entity so that they can not corner the market.  They also try to maintain records of the available underlying commodity to reduce the chance of fail-to-deliver scenarios.

Sat, 01/18/2014 - 19:43 | 4344818 Manthong
Manthong's picture

"there may not be enough gold to go around if everyone with a futures contract insists on taking delivery of physical bullion."

http://www.youtube.com/watch?v=J6_1Pw1xm9U

..anybody with the need or enough capital to play that game knows its a cash only deal.

Sat, 01/18/2014 - 20:47 | 4344941 fonestar
fonestar's picture

Let's play Jenga with the modern world and pull another coin out!

Sat, 01/18/2014 - 21:45 | 4345043 Unpopular Truth
Unpopular Truth's picture

yeah... the goldcoin :)

Sat, 01/18/2014 - 23:25 | 4345228 Squid-puppets a...
Squid-puppets a-go-go's picture

Hey doeant COMEX have shareholders / owners, and isnt there a TRUSTEE of the organisation.

If so , doesnt that TRUSTEE have a legal obligation to pull the pin on the company given its 112 to one obligations

Sun, 01/19/2014 - 02:51 | 4345423 Pinto Currency
Pinto Currency's picture

Graphs for those who want detail.

http://jessescrossroadscafe.blogspot.co.nz/2014/01/comex-warehouse-potential-claims-per.html

 

Each day, the LBMA trades 900x the volume of daily global gold production from mines.

That's paper moving at the speed of light.  No wonder it burns up.

http://www.safehaven.com/article/32394/for-prime-minister-cameron-re-lbma-gold-trading

 

Sun, 01/19/2014 - 11:33 | 4345811 FranSix
FranSix's picture

Got Gold Report posted this same chart as well as others through Tocqueville Funds' pdf.  This is not the number of futures contracts vs. available physical, but the fractional reserve of gold.  I suppose the ratio of owners to physical gets a lot of attention, but the whole picture is very compelling.

One thing people are looking over is the importance of gold price fixing allegations since German regulators pulled Deutsebank.  Options expiry on derivatives contracts is Tuesday, and I believe most of the financial interest in the gold market has gone over into this type of trading.

http://www.gotgoldreport.com/2014/01/tocqueville-gold-strategy-investor-letter-year-end-2013.html

Sun, 01/19/2014 - 11:40 | 4345820 Bendromeda Strain
Bendromeda Strain's picture

But nobody ever actually say's "give me the gold".... do they?

https://www.youtube.com/watch?v=bZfyrIPw3wY

Sun, 01/19/2014 - 11:44 | 4345830 Bendromeda Strain
Bendromeda Strain's picture

The dude tells the truth about gold - which is why they make him wear a WACO sign (the one on his back says KIKME)

Sun, 01/19/2014 - 19:43 | 4346912 CMEtrader
CMEtrader's picture

 

I wear WACO on my badge because that is my trading symbol.  You get to pick.  Most people use thier initials but my initials are HCK.  If my symbol was HCK then everyone would call me HICK.  I challenge you to find a Texan who wants to be called HICK.   I chose WACO because I did my undergraduate at Baylor University in Waco, Texas.  

 

Tres Knippa

Sun, 01/19/2014 - 10:35 | 4345716 Black Swan 9
Black Swan 9's picture

@jbvtme

Excellent link, thanks for posting. PCR is THE best, clearly explains the convoluted economic/financial mess, or any issue he writes about..

"Default on delivery of purchased gold would terminate the Federal Reserve’s ability to manipulate the gold price. The entire world would realize that the demand for gold greatly exceeds the supply, and the price of gold would explode upwards. The Federal Reserve would lose control and would have to abandon Quantitative Easing. Otherwise, the exchange value of the US dollar would collapse, bringing to an end US financial hegemony over the world."

Sun, 01/19/2014 - 12:06 | 4345860 chubbar
chubbar's picture

One of you sharpshooters feel free to jump in but wouldn't the ending of QE send the interest rates soaring which would lead to an almost immediate default on the gov't debt, not to mention the possible sudden stop of the global economy? Does the dollar go up in value if the Gov't defaults on it's debt? In order not to default on it's debt it either needs to be forgiven OR print like a bastard. Not sure how debt forgiveness would impact the dollar. Pretty sure the print option would collapse the value at some point. I don't see a way out other than forgiveness and don't have a clue what that would mean or the impact it would have?

Mon, 01/20/2014 - 04:00 | 4347597 X_mloclaM
X_mloclaM's picture

Did you miss the... ummm... balance sheet expansion, that's not exactly set to roll-off anytime soon?

Did you simply ignore those dollars/liabilities, far, far, far in excess of good assets?

So with no dollar demand, yield volatility from an imploding China/Japan triggering a broader global depression, and you get higher rates from that?

 

What part of: higher supply of dollars, and lower demand, do people still not understand?

They must need another Japan as an example... looks like the monetarists will get all the examples they need to sort it out. lmaooo

Sun, 01/19/2014 - 10:54 | 4345743 SIOP
SIOP's picture

@vbvtme,   Thank you for that link on "The Hows and Whys of Gold Price Manipulation".  I learned stuff, Thank you.

Sat, 01/18/2014 - 20:30 | 4344915 Cognitive Dissonance
Cognitive Dissonance's picture

Told ya so, it was the central bankers, in the PONZI room, with the worthless fiat. :)

<Now that's motivation enough to destroy the world in order to temporarily save their asses.>

Sun, 01/19/2014 - 00:09 | 4345284 Scarlett
Scarlett's picture

Not for long, CD; not for long.

Sun, 01/19/2014 - 09:19 | 4345657 Cap Matifou
Cap Matifou's picture

Actually this may equal a wake up blow into the shofar. Guess, how much of the lousy 37 tons of German gold returned last year was actually coughed up by the FEDz?

The whole truth about the gold of the Bundesbank
http://translate.google.com/translate?sl=de&tl=en&js=n&prev=_t&hl=en&ie=...
300 tons of gold to be fetched from the cellar of the Federal Reserve in New York to Germany. Now explains the Bundesbank: Only five tons have arrived (in 2013, the rest came from Paris). Why is all this so difficult?

Sun, 01/19/2014 - 02:06 | 4345381 Tall Tom
Tall Tom's picture

You have the Clue. You have it right. SO YOU WIN...or...you lose?

 

Exponential Growth leads to Exponential Collapse. Comex Futures look like that they are just a little...INSOLVENT.

 

As for a Contract for Delivery from Comex? With that type of leverage I would not want that CONTRACT at any price. I cannot trust that they will STAND AND DELIVER.

 

So, COUNTERINTUITIVELY, you can EXPECT A PRICE DECLINE. Nobody in their right mind KNOWINGLY purchases NON PERFORMING CONTRACTS.

 

Why purchase a lawsuit???

 

(If you knowingly purchase a non performing contract, and it can be demonstrated that you did, then that is prima facie evidence that you have no valid claims. That is how CME Group's Attorneys will prevail as the lawsuits are dismissed as frivolous.)

 

So it will be the lawyer in a courtroom with case law and a judge.

 

FOFOA is correct. The price of Gold on Comex will go to ZERO as they have no Gold to Deliver. Now I understand it. It becomes clearer by the passing hour.

 

Fuck Jeffery Christian and CME Group.  Short Gold Futures, drain CME Group's capital, and purchase Physical Gold with the profits.

Sun, 01/19/2014 - 08:25 | 4345624 Quinvarius
Quinvarius's picture

They might go to zero.  But I suspect it will be more like some people will be allowed to default and others will not.  I think a lot of the hangers on who think they are selling paper for free are going to be surprised when they are forced to settle in cash at quite a bit higher prices, even if they have no gold.

Sun, 01/19/2014 - 11:58 | 4345852 swmnguy
swmnguy's picture

"Some people will be allowed to default and others will not."  There's the key.  And if you're wondering who will be allowed to default, it ain't gonna be you.

Sun, 01/19/2014 - 12:16 | 4345875 fockewulf190
fockewulf190's picture

When the COMEX can no longer deliver, the paper price dissolves and the physical price takes over.  The game moves to Shanghi and Singapore.

Sun, 01/19/2014 - 04:08 | 4345504 Oracle 911
Oracle 911's picture

"Knippa warns that if 1 entity asks for delivery of a position-limit-size long in gold, it will absorb 81% of COMEX's inventory... and if 2 entities were to do so... COMEX has a problem..."

 

And both are/will be Chinese proxy, problems ahead for the West.

Sat, 01/18/2014 - 21:04 | 4344971 Panafrican Funk...
Panafrican Funktron Robot's picture

http://www.cmegroup.com/trading/energy/nymex-delivery-notices.html

Link to track the gold stocks directly.  Registered gold is the only gold that can be used to settle a futures contract.  This is the gold that has been rapidly depleting.  It is now down to 370K oz.  That means that in the /gc contract, with 100 oz = 1 contract, a total of 3700 contracts represents the entire stock of gold available for settlement.  Roughly 120,000 contracts traded just on Friday alone.

Sat, 01/18/2014 - 21:40 | 4345036 dmger14
dmger14's picture

The guy from daytradeshow just made a video where someone asked him about this and he looked into it.  He says there 370k registered and that has fallen by about 90%.  BUT 9.8 MILLION eligible and that hasn't fallen much over the past year or so. He says the COMEX rep laughed when he inquired about a possible shortage because the rep says they could simply "flip a switch" and move inventory from eligible to registered.  But isn't eligible ENCUMBERED?  Also, don't people use COMEX for storage with no intention of ever selling?  Someone please enlighten me!

Sun, 01/19/2014 - 00:13 | 4345287 Scarlett
Scarlett's picture

Tungsten

Sun, 01/19/2014 - 02:55 | 4345430 Pinto Currency
Pinto Currency's picture

'Registered' gold is available for delivery on the exchange.

'Eligible' gold is privately held. 

Sun, 01/19/2014 - 10:34 | 4345714 Winston Churchill
Winston Churchill's picture

Tell that to MF Global customers.

I don't see this game going much longer.They are NOT going to run the gold down to nothing.

Only the truly insane would do that.

COMEX will default in the next few months. Buy phyz now while you still can.

Sun, 01/19/2014 - 12:08 | 4345865 youngman
youngman's picture

I would not put it past a banker when they are drowning to sell or deliver your eligible gold to someone...and hiding behind some wording in the agreement that their lawyers will fight over for years.....

Sun, 01/19/2014 - 00:17 | 4345295 Chuck Walla
Chuck Walla's picture

Satan, thy name is re-hypothecation.

FORWARD SOVIET!

 

Yell "HUI" as we slide down the chute!

Sun, 01/19/2014 - 08:45 | 4345635 Quinvarius
Quinvarius's picture

I don't believe any of the numbers, or any of the laws regarding segregation.  But at this point, I think it is about flow, not stock.  The West is running out.  And at some point the Fed/Treasury/cartel will come to a pint where they are unable or unwilling to put any more gold into the system.   And the US yearly mining suppy of 225 tons, even dropped all at once, will not be enough to stop the rise.  I don't put much faith in the COMEX data.  I think it is all encumbered and lies.  How hard can it really be to come up with 10 tons and double these figures?  But here it is:

Registered

http://www.24hgold.com/english/interactive_chart.aspx?title=COMEX%20WAREHOUSES%20REGISTERED%20GOLD&etfcode=COMEX%20WAREHOUSES%20REGISTERED&etfcodecom=GOLD

Eligible

http://www.24hgold.com/english/interactive_chart.aspx?title=COMEX%20WAREHOUSES%20eligible%20GOLD&etfcode=COMEX%20WAREHOUSES%20eligible&etfcodecom=GOLD

Total

http://www.24hgold.com/english/interactive_chart.aspx?title=COMEX%20WAREHOUSES%20total%20GOLD&etfcode=COMEX%20WAREHOUSES%20total&etfcodecom=GOLD

 

Mon, 01/20/2014 - 03:52 | 4347594 X_mloclaM
X_mloclaM's picture

CME Group rep is right, anyone can register gold for sale on their market, and with 170,000mt aboveground it's incredible only 10 or so want to do that....  Of course gold owned and eligible for registration could decide to turn to supply, selling at higher prices. But, that's the volume costructing the price move up, betcha delivery-volume-weighted price averages (DVWAP?) for the pM's are much higher as who is selling meaningful volumes of physical at $1,180.

Sun, 01/19/2014 - 13:40 | 4346073 mick_richfield
mick_richfield's picture

"Registered gold is the only gold that can be used to settle a futures contract."

Not true at all!  "Eligible" gold can also be used to settle futures contracts.

You just have to steal it.

Sat, 01/18/2014 - 19:52 | 4344837 OC Sure
OC Sure's picture

Is another way of saying this that for every buyer of a contract that is willing to take delivery of the purchase there is also a seller who is willing to make delivery of their sale? Otherwise, how can the contract exist? (That is of course if it goes to expiration.)

Sun, 01/19/2014 - 02:35 | 4345398 Tall Tom
Tall Tom's picture

If the Short Holder can prove that the long buyer knew beforehand that the seller had nothing to deliver the court will dismiss the case as frivolous and that there was no binding Contract.

 

It is just a matter of demonstrating that a prudent action on behalf of the buyer would have been to research the seller's ability to STAND and Deliver. Since Inventories are PUBLIC KNOWLEDGE and disclosed then it can be demonstrated that the Buyer knew that the Seller could NOT DELIVER.

 

Case Dismissed. No enforcable contract was offered or sold.

 

YOU CAN BET THAT THIS WILL BE HOW IT WILL GO DOWN IN US COURTROOMS.

 

If I am seeking DElivery I would SELL EVERY CONTRACT that I had with LBMA and CME Group and open contracts directly with the Miners.

 

You can bet that the Large Players have Lawyers whom are advising their clients to do the same. Thus with an abundance of contracts for sale on the Comex Futures Exchange the price of Gold will DROP as a result of this.

 

This is what happens when trust is eroded.

 

If you have Physical and think that you can sell it and then buy it back cheaper it is a MISTAKE. You would be foolish to divest of your Physical Gold.

 

This just means that CME Group's Futures Market becomes irrelevant as the method for Price Discovery.

 

First the London Fix is made irrelevant.

Then the Comex is made irrelevant.

 

We must remove the layers of the LIES to get to the Truth of the true Price, VALID PRICE DISCOVERY.

 

The plan is being unfolded before your eyes.

Sun, 01/19/2014 - 09:59 | 4345685 chindit13
chindit13's picture

I don't think you could possibly exhibit any less understanding of the nature, function, rules, and practice of futures markets.  You get yourself in a lather over something about which you know nothing, and form conclusions which are pure delusion.

At least being anonymous saves you the public embarrassment.

Enjoy.

Sun, 01/19/2014 - 11:01 | 4345750 SilverIsKing
SilverIsKing's picture

It can possibly go down the way he says it will but only if he is the judge in the case.

Sun, 01/19/2014 - 11:02 | 4345753 Tinky
Tinky's picture

Rather than launching an ad hominem attack – and an ironic one on that, given your anonymity – why don't you explain how his post is misguided, for the benefit of readers who are less enlightened than yourself?

Sun, 01/19/2014 - 11:40 | 4345821 chindit13
chindit13's picture

See my earlier post below.  Salvation, or at the very least enlightenment, lies within.

Sun, 01/19/2014 - 12:19 | 4345880 chubbar
chubbar's picture

I'm not an attorney so this may be incorrect but my understanding that in contract law each party must give "consideration" or something of value. The buyer is giving money for the contract. The seller, if naked selling, is giving no consideration. This argument actually prevailed in a case decades ago up in Minnesota (credit river). The plaintiff successfully argued that he didn't owe his mortgage because all the bank did was an accounting entry and therefore didn't give "consideration". The judge died of poisoning 6 months later and the ruling was reversed on appeal (imagine that).

Also, just because the inventories are published and that there is clearly more contracts than gold doesn't mean a particular seller has no gold. There is some gold being traded so some of the contract sellers do in fact have gold. Not sure of this point other than that. I've not heard a judge say that the scammer is innocent because the mark should have known the guy was a crook but I suppose anything could happen these days. Especially with the bought off judges we have witnessed recently. (cough-roberts-cough)

Sun, 01/19/2014 - 18:31 | 4346764 lewietheparrot
lewietheparrot's picture

There is no contract----only contract specs

The Board of Governors of the exchange ultimately decides delivery issues

We went all through this in 1980 with the Hunts

Read about----history is repeating

I can't believe that it playing out again two generations later

No one cares what any of us think or believe

It's in the bag----let it go and pretend your stack is just insurance---not a game for kids

 

Sun, 01/19/2014 - 11:49 | 4345837 jemlyn
jemlyn's picture

I read about buyers contracting with the mines.  Could this be why the mining equities are going up?  Will there be a divergence between the direction of the spot price and the price of equities?

Sun, 01/19/2014 - 13:55 | 4346117 dogbreath
dogbreath's picture

The miners have been consolidating because they cannot raise money to finnance exploration and costs for producers has gone up as the price of gold dropped to current levels.   Mining stocks are generally unpopular but the smart money seems to be coming  back into the market.  The junior miners are severely oversold and a quality comanies are a bargain

Sat, 01/18/2014 - 21:09 | 4344979 Muddy1
Muddy1's picture

Why not ask Celente this very question?

"buy physical gold; avoid paper"

Sun, 01/19/2014 - 11:15 | 4345777 giggler321
giggler321's picture

You know he told everyone to buy physical while he had ETF's with a delivery option at 1425oz.  You gotta wonder why he's choose to say that and essentially buy paper?? esp. as he nevered ended up owning courtesy of MF

Sun, 01/19/2014 - 05:09 | 4345526 Central Wanker
Central Wanker's picture

COMEX limits the size of a single entity so that they can not corner the market.

 

Right... The position limit for gold is 3000 contracts? On December, JPM stopped more than 6000 contracts. Probably they would have stopped more, should there have been more gold available.

Did JPM corner the market?

Sun, 01/19/2014 - 09:24 | 4345658 jerry_theking_lawler
jerry_theking_lawler's picture

yes, yes, we all understand futures contracts...we are ZHers....but what gets all of us is that when all the contracts 'cancel out' and their is someone standing for delivery of an item that isn't available, then there's the rub.....

 

see, someone who wanted to make money (or worse manipulate or speculate in the market) made a promise that they could not fulfill, upfront, sometime knowingly. and it was all 'legal' by our standards. there is just something inherently wrong with this idea.

Mon, 01/20/2014 - 10:15 | 4347917 DOT
DOT's picture

Indeed, the proffer itself was fraudulent. We have both awareness and intent illustrated in the transaction. 

Both parties may be guilty; at least one must be.

 

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