COMEX Default Risk As Gold Inventories Plummet 36%

Today’s AM fix was USD 1,373.00, EUR 1,037.32 and GBP 874.30 per ounce.
Yesterday’s AM fix was USD 1,386.00, EUR 1,050.56 and GBP 884.27 per ounce.  

Gold fell $2.00 or 0.14% yesterday, closing at $1,386.50/oz. Silver fell $0.14 or 0.59%, closing at $23.67. At 2.48 EDT, Platinum fell $9.90 or .7% to $1,479.00/oz, while palladium dropped $15.28 or 2.2% to $682.22/oz.

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COMEX Gold Inventories, GOFO Rates and Leverage - (Bloomberg)

Gold tracked oil lower today after Russia offered to work with Syria’s Assad to put their chemical weapons under international control. Firmer equities and equities at record highs showed risk appetite remains very high and “irrational exuberance” is back despite significant risks, including geopolitical risk.

Other risks worth keeping in mind are the likelihood of the Eurozone debt crisis flaring up once the German elections on September 22 are over. It is worth bearing in mind too, the coming political and possible financial fracas over the U.S. debt ceiling - U.S. Federal debt recently surged over $16.9 trillion.

The immediate risk of a unilateral bombing of Syria has abated but there remains a real risk of confrontation in the region and the possibility of a wider war in the Middle East involving Iran and Israel and their respective allies. This will support gold and could contribute to materially higher prices.

However, of far more importance to gold is the very tight physical market place which is manifest in the negative gold forward interest rates, gold futures still in backwardation and perhaps most importantly plummeting inventories on the COMEX.

Comex gold inventories have plunged more than 36% year to date, creating a market more leveraged than it has been for the last nine years. Inventories are down from 11.059 million ounces to 7.034 million ounces today. 

As gold fell in recent months or was manipulated lower, depending on your viewpoint, store of wealth interest in physical gold rose, elevating physical premiums. This has also given traders incentives to take delivery and sell paper gold. 

This shortage of readily available physical gold in large volumes will likely lead to even higher premiums by lowering gold's forward rates, straining borrowers and raising the likelihood of something we have warned of for some time - a COMEX delivery default.

A COMEX default on delivery of precious metals and specifically of gold bullion bars remains a risk. It is of significant importance and that is why we have covered its possibility since 2011. A COMEX default would have serious ramifications not just for precious metals markets but for the wider commodity markets, for the U.S. dollar and all fiat currencies and our modern  monetary system.

COMEX Gold Inventories, 5 Years (Bloomberg)

As long as gold remains in backwardation and COMEX inventories continue to fall the possibility of a COMEX default cannot be ruled out – especially as gold and silver bullion inventories are very small vis-a-vis possible capital allocations or foreign exchange diversification to gold in the coming weeks and months.

We believe that the sharp fall seen in emerging market currencies in recent weeks will lead to an increase in central bank demand for gold in order to buttress and support devaluing paper currencies.

COMEX gold inventories are down from 11.059 million ounces at the start of the year to 7.034 million ounces today. This is worth $9.66 billion at today’s prices meaning that a handful of billionaires or just one powerful creditor nation state with large foreign exchange reserves, such as Russia, could corner the COMEX gold market and cause a default.  

Russia’s foreign exchange reserves are at $508 billion . Mainland China still holds the largest foreign exchange reserves in the world, with US$3.4967 trillion at the end of June. It is followed by Japan, which had foreign exchange reserves of US$1.1876 trillion at the end of July.

Gold In US Dollars, 5 Years - (Bloomberg)

The possibility of an attempted cornering of the bullion markets through buying and taking delivery of physical bullion remains real and would likely lead to a massive short squeeze which would see gold and silver surge to well over their inflation adjusted high of $2,500/oz and $140/oz.


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