Bullion Banks Once Again Target Gold"s 200-Day Moving Average

Bullion Banks Once Again Target Gold"s 200-Day Moving Average

Written by Craig Hemke, Sprott Money News 

 

 

In the hope of inspiring Comex speculator liquidation, The Banks are once again targeting gold"s 200-day moving average.

 

Twice previously this year, The Banks have managed to maneuver the gold price down and through the 200-day moving average. On these prior occasions, the speculator selling that followed allowed The Banks to buy back and cover large amounts of their perennial short contracts.

 

On Friday, April 28 of this year, total Comex gold open interest was at 470,787 contracts and price was clinging to support at the 200-day. The next market day of Monday, May 1 saw Comex gold smashed for $15. By the time the selling subsided on Tuesday, May 9, price had fallen nearly $60 and total Comex gold open interest had contracted by over 37,000 contracts.

 

What had occurred? When price fell and closed below the 200-day on May 1, tremendous amounts of speculator long liquidation ensued. It was this selling that drove price down. Taking the other side of these trades were The Banks, which used the Spec selling to buy back and cover existing short positions.

 

Evidence of this is seen in the Commitment of Traders report from the survey week that ended on Tuesday, May 9. That report saw the Large Specs in gold decrease their NET long position by 40,200 contracts while the Commercials (Banks) decreased their NET short position by 39,500 contracts.

 

Price then rallied from $1225 on May 9 to $1305 on June 6 before beginning another pullback.

 

On Friday, June 23, total Comex gold open interest was at 449,164 contracts and price was once again clinging to support at the 200-day. The next market day of June 26 saw another one of those infamous "flash crashes" that led to a temporary breach of the 200-day but this line wasn"t completely breached on a closing basis until Friday, June 30. Price then fell nearly $40 in five days before bottoming at $1215 on Monday, July 10.

 

From June 23 through July 10, price fell over $50 and the 200-day moving average yet, this time, total interest actually rose by over 30,000 contracts. Again, what had occurred?

 

This selloff not only saw Spec long liquidation, it also saw a significant amount of new Spec shorting! Evidence of this is again found in the CoT reports of the combined two weeks of June 28 through July 11. Those reports showed the Large Specs in gold decrease their NET long position by 71,000 contracts while the Commercials decreased their NET short position by 76,000 contracts.

 

All of this is summarized on the chart below:

 

 

So now here we are again. Just as in April and June, price has fallen back and is finding support above the 200-day. Also just as in April and June, the Large Speculators have thus far remained steadfast with their NET position mostly unchanged over the last four CoT reports. With history as your guide, what level do you think The Banks will target next?

 

Of course it"s the 200-day moving average, currently found near $1266! There can be little doubt that The Banks hope to soon break this level again. In doing so, they hope to inspire enough Spec liquidation that open interest will fall back under 500,000 contracts from the current 529,000. This 30,000+ long contract liquidation by The Specs would allow The Banks to cover 30,000+ shorts...all of this before the next rally sets in.

 

And how far might price fall if The Banks can pull this off? Well, just as in May and July, not too far really. Note that those two prior riggings only moved price about $35-$45 below the 200-day before it turned and rallied. A similar drop now would target the $1230 area but I don"t think it would make it quite that far. The chart below shows considerable, long-term support in the area near $1240, instead.

 

 

None of this changes, of course, our 2017 forecast made back in January. Back then, we speculated that price would advance through 2017 in a three-steps-forward, two-steps-back sort of pattern with the year"s highest prices coming in the fourth quarter. Let"s just wait now to see if The Banks are able to cover more of their short position before this final leg of the 2017 rally begins.

 

 

Questions or comments about this article? Leave your thoughts HERE.

 

 

 

 

 

Bullion Banks Once Again Target Gold"s 200-Day Moving Average

Written by Craig Hemke, Sprott Money News 

 

Extremes Are Everywhere

Authored by Lance Roberts via RealInvestmentAdvice.com,

This past weekend, I discussed what appears to be the markets ongoing melt-up toward its inevitable conclusion. Of course, that move is supported by the last of the “holdouts” that finally capitulate and take the plunge back into a market that “can seemingly never go down.” But therein lies the danger. To wit:

“However, it should be noted that despite the ‘hope’ of fiscal support for the markets, longer-term conditions are currently present that have led to rather sharp market reversions in the past.”

“Regardless, the market is currently ignoring such realities as the belief ‘this time is different’ has become overwhelming pervasive.”

The other problem on a short-term basis is the market is pushing very elevated levels currently. As shown below, with RSI (14) now above 70, the market 3-standard deviations above the 50-dma, and the MACD over 13, in both previous cases over the last year a short-term reversal followed.

A similar outcome would not be surprising this time either, so some caution is advised.

Positioning Review

The COT (Commitment Of Traders) data, which is exceptionally important, is the sole source of the actual holdings of the three key commodity-trading groups, namely:

• Commercial Traders: this group consists of traders that use futures contracts for hedging purposes and whose positions exceed the reporting levels of the CFTC. These traders are usually involved with the production and/or processing of the underlying commodity.


• Non-Commercial Traders: this group consists of traders that don’t use futures contracts for hedging and whose positions exceed the CFTC reporting levels. They are typically large traders such as clearinghouses, futures commission merchants, foreign brokers, etc.


• Small Traders: the positions of these traders do not exceed the CFTC reporting levels, and as the name implies, these are usually small traders.

The data we are interested in is the second group of Non-Commercial Traders.

This is the group that speculates on where they believe the market is headed. While you would expect these individuals to be “smarter” than retail investors, we find they are just as subject to human fallacy and “herd mentality” as everyone else.

Therefore, as shown in the series of charts below, we can take a look at their current net positioning (long contracts minus short contracts) to gauge excessive bullishness or bearishness. With the exception of the 10-Year Treasury which I have compared to interest rates, the others have been compared to the S&P 500.

Volatility Extreme

The extreme net-short positioning on the volatility index suggests there will be a rapid unwinding of positions given the right catalyst. As you will note, reversals of net-short VIX positioning has previously resulted in short to intermediate-term declines. With the largest short-positioning in volatility on record, the rush to unwind that positioning could lead to a much sharper pickup in volatility than most investors can currently imagine.

Crude Oil Extreme

The recent attempt by crude oil to get back to $50/bbl coincided with a “mad rush” by traders to be long the commodity. For investors, it is also worth noting that crude oil positioning is also highly correlated to overall movements of the S&P 500 index. With crude traders currently extremely “long,” a reversal will likely coincide with both a reversal in the S&P 500 and oil prices being pushed back towards $40/bbl. 

While oil prices could certainly fall below $40/bbl for a variety of reasons, the recent bottoming of oil prices around that level will provide some support. Given the extreme long positioning on oil, a reversion of that trade will likely coincide with a “risk off” move in the energy sector specifically. If you are overweighted energy currently, the data suggests a rebalancing of the risk is likely advisable.

US Dollar Extreme

Recent weakness in the dollar has been used as a rallying call for the bulls. However, a reversal of US Dollar positioning has been extremely sharp and has led to a net-short position.

As shown above, and below, such negative net-short positions have generally marked both a short to intermediate-term low for the dollar as well as struggles for the S&P 500 as a stronger dollar begins to weigh on exports and earnings estimates.

Interest Rate Extreme

One of the biggest conundrums for the financial market “experts” is why interest rates fail to rise. Apparently, traders in the bond market failed to get the “memo.” With the net positioning in bonds at some of the highest levels since the financial crisis, there is little reason to believe the “bond bull” market is over. Look for a reversal of the current positioning to push bond yields lower over the next few months.

It is also worth watching the net-short positioning the Euro-dollar as well which has also begun to reverse in recent weeks. Historically, the reversal of the net-short to net-long positioning on the Eurodollar has often been reflected in struggling financial markets.

Smart Vs. Dumb Money Extreme

While we have been looking at solely the large non-commercial traders above, they are not the only ones playing in the future markets. We can also dig down into the overall net exposure of retail investors (considered the “dumb money”) versus that of the major institutional players (“smart money”)

The first chart below shows the 3-month moving average of both smart and dumb-money players as compared to the S&P 500 index. With dumb-money running close to the highest levels on record, it has generally led to outcomes that have not been favorable in the short-term.

We can simplify the index above by taking the net-difference between the two measures. Not surprisingly, the message remains the same. With the confidence of retail investors running near historic peaks, outcomes have been less favorable.

None of this analysis suggests that a market “crash” is about to occur tomorrow. However, with complacency high, and investors scrambling to find excuses why markets can only go higher, suggests that extremes in positioning have likely been reached. 

This was a point made by Macquarie’s Viktor Shvetz, the bank’s head of global equity strategy, yesterday:

“Investors seem to be residing in a world without any notable perceived risks. It is an extraordinary and unprecedented situation, particularly given unresolved issues of over-leveraging and associated over-capacity as well as profound disruption of business and economic models, which are not just depressing inflation but also causing extreme political and electoral outcomes while feeding Maslowian-type disappointments across labor markets.

What can explain such lack of concern regarding potential risks?

In our view, the only answer is one of investors’ perception that, as we discussed in our preview of 2H’17, ‘slaves must remain slaves’ and hence, neither Central Banks nor other public institutions can afford to step aside but need to continue to guarantee asset price inflation. In its turn, this can only be achieved by ensuring that volatilities are contained (as they are the deadliest enemy of an ongoing leveraging) and liquidity is expanding at a sufficient pace to accommodate nominal demand.

We remain constructive on financial assets (both equities and bonds), not because we expect a return to self-sustaining private sector-led recovery and growth but because we believe that an ongoing financialization is the only politically and socially acceptable answer.

In our view, therefore, the greatest risk is one of policy.”

The complete disregard for “risk” has never worked out well for investors in the past and is unlikely to be different this time either. But remember, in the short-term, the markets can remain irrational longer than logic would predict and they always “feel” their best at the peak.

How Many Gold Bars Do London Vaults Hold

This week for the first time - in the name of "transparency" - the London Bullion Market Association unveiled that as at 31 March, 2017 there were 7,449 tonnes of gold, or 596,000 gold bars, valued at $298 billion sotred in the vaults around London as well as $19 billion in silver. Only the gold hoard at Fort Knox and among Indian households said to account for more than the LBMA"s inventory, which clears just over $18 billion in gold daily. Most London gold is stored in the Bank of England, with the rest in private vaults, including those operated by HSBC and JPMorgan, both profiled previously (here and here).

The Bank of England holds most of the gold and silver in London, or over 60% of the total gold, and already publishes some details of its holdings. The new LBMA data supposedly also reveals how much private custodians, HSBC, JP Morgan, and ICBC Standard Bank among them, keep in their vaults.

The publication of vaulting statistics marks the first step toward the LBMA"s promise of greater transparency, which will eventually be enhanced further by trade reporting that is set to also be published later on.
respectively.

As UBS strategist Joni Teves writes, this addition to the available pool of information helps various market participants, as well as regulators, have a better assessment of market activity in precious metals. For instance, comparing the newly released vaulting statistics with trade flows allows for a better understanding of the movement of metal and the dynamics between investment and physical demand. Combined with other indicators of market length, such as Comex net longs and ETF holdings, it also enables market watchers to have a better gauge of market positioning. The data released so far confirms relatively limited investor participation this year – perhaps as a result of a broad shift toward cryptocurrencies as the new "safe" currency, at least among some age groups. Bank of England (BoE) data, which extends further back to 2011, confirms that investor positions have declined considerably from the peak during the height of the bull-run and that there"s room for gold exposures to grow from here.

As LBMA data series extends up ahead, we should get an even better picture. All in all, changes in gold holdings as illustrated by LBMA and BoE reinforce a positive stance on gold.

Courtesy of UBS, below we present extended observations on what the LBMA data reveal, and the implications for the broader gold market in general, as well as investing in the precious metal in particular.

Never "too much of a good thing" with market data

The London Bullion Market Association (LBMA) and the London Precious Metals Clearing Limited (LPMCL) have released data on gold and silver inventories sitting in London vaults (loco London gold and silver), a move that is consistent with wider developments in the industry towards greater transparency. This addition to the available pool of information helps various market participants, as well as regulators, have a better assessment of market activity. Comparing the newly released vaulting statistics with trade flows allows for a better understanding of the movement of metal and the dynamics between investment and physical demand. Combined with other indicators of market length, such as Comex net longs and ETF holdings, it also enables market watchers to have a better gauge of market positioning. The publication of vaulting statistics marks the first step towards more transparency in the industry; trade reporting that is set to also be published later on should further enhance this. Having data on loco London gold and silver trading volumes would allow for better comparisons of trading activity and interest across various regions. As far as market analysis is concerned, there"s no such thing as "too much of a good thing" when it comes to information that provides additional insights.

The LBMA and the LPMCL first announced the plan to publish gold and silver vault holdings in May. The data published today represents aggregated data collected from the Bank of England (BoE) and seven other custodians that offer vaulting services, and covers end-period holdings of gold and silver from July 2016 to March 2017. Going forward, this data will be published each month, with a three-month lag. The data includes gold and silver in the form of large bars, kilo bars or coins, but excludes jewellery and other private holdings held in vaults that are not part of the London clearing system. These statistics only include gold and silver that is held physically in London, defined by the LBMA as “held within the environs of the M25”. This metal underpins the daily trading and clearing activities in the London bullion market.

London continues to be a key gold trading centre globally, with an average of $18.1bn worth of gold cleared each day in March 2017, according to LBMA net daily clearing statistics. Clearing data is different from turnover data, so until we get LBMA trade reporting statistics, comparing London market activity against that of other regions remains challenging. But to somehow put things into context for now, it probably still helps to note that the average daily turnover of physical gold spot contracts on the Shanghai Gold Exchange is over $1bn, while an average of about $32bn worth of gold futures trade on Comex each day.

Estimating investor gold holdings in London

One of the recurring questions that gets asked by clients and various market participants is on the level of gold or silver holdings or the level of investor positioning. This has always been very difficult to answer. The market has had to rely on third-party estimates of above-ground holdings, such as those provided by Thomson Reuters GFMS, the World Gold Council or Metals Focus. Other ways that we"ve tried to address this type of question is to look at Comex net long positions and ETF holdings. Now, with the availability of vaulting statistics, we can add another dimension to the analysis. We can start by saying that 7,449 tonnes or 239.49 moz of gold and 32,078 tonnes or 1,031.32 moz of silver were sitting in London vaults as of end-March.

For gold, we can take the analysis further: as the BoE also publishes gold vault holdings data separately, we are able to split out – at least in aggregate – what is held in other vaults. This is not possible for silver as the BoE does not provide silver custodial services. The BoE provides gold custody services primarily to central bank customers to help them get access to London gold market liquidity, although it also holds some gold custody accounts on behalf of certain commercial banks that support central bank access to the liquidity of the London gold market. On the assumption that the BoE custody service primarily caters to central bank customers, it’s probably fair to say that 1) the bulk of BoE gold represents official sector holdings and 2) gold held in other vaults is likely to be more investment-related. To be sure, this is somewhat simplistic in that, as mentioned earlier, the BoE also offers custody accounts to certain commercial banks, while at the same time it is also possible for central banks to hold their gold in non-BoE vaults.

To put some context around this, let us consider for illustration"s sake that about 80% to 90% of BoE gold holdings are accounted for by the official sector. Let us also consider for simplicity that the vast majority of gold held in commercial vaults represents investor holdings and only a negligible amount comprises official sector gold accounts. These simplistic assumptions would therefore imply that over the past year, an average of about 96.68 to 110.92 moz ($119-139 bn) of investment-related gold was held in London. These inventories would include metal held on behalf of ETFs. Based on our database of gold ETFs, we estimate an average of around 48.78 moz or about $60bn worth of gold was held in London vaults to back ETF shares during the same period. Taking these ETF-related holdings into account would then leave roughly around 47.90 to 62.14 moz or about $60bn to $78bn worth of gold in unallocated and allocated accounts as available pool of liquidity for OTC trading activities.

While we now have a starting point with the vaulting statistics, a breakdown of the type of gold holdings remains unavailable. As such, the discussion above and the charts and tables below are presented here to provide some context. Nevertheless, despite these limitations, the data still somehow supports the broad assumption on how loco London gold stocks may be split between official sector and investor holdings. For instance, the data shows that gold held at the BoE appears to be more stable relative to gold held in other London vaults, such that changes in total loco London gold over the past nine months have been driven more by changes in non-BoE gold. Intuitively, it would make sense for investment-related gold holdings to be more volatile relative to official sector holdings. Central banks hold gold as part of their official reserves and also serve monetary purposes, typically having much longer.

While we now have a starting point with the vaulting statistics, a breakdown of the type of gold holdings remains unavailable. As such, the discussion above and the charts and tables below are obviously only presented here to provide some context. Nevertheless, despite these limitations, the data still somehow supports the broad assumption on how loco London gold stocks may be split between official sector and investor holdings. For instance, the data shows that gold held at the BoE appears to be more stable relative to gold held in other London vaults, such that changes in total loco London gold over the past nine months have been driven more by changes in non-BoE gold. Intuitively, it would make sense for investment-related gold holdings to be more volatile relative to official sector holdings. Central banks hold gold as part of their official reserves and also serve monetary purposes, typically having much longer time horizons.

Matching ETF data against total loco London inventories

Gold and silver held in London vaults that back shares in exchange-traded funds (ETFs) are also included in the statistics, regardless of where the ETF is listed. In general, this means that although gold or silver ETF shares may trade on exchanges elsewhere, as long as the metal is held physically in London, these would be considered loco London and form part of the LBMA’s monthly statistics. For instance, the largest gold ETF is listed and trades on the New York Stock Exchange (NYSE), but its designated custodian ultimately holds the underlying metal in its London vaulting facilities. Similarly for silver, the ETF with the largest holdings trades on the NYSE, but some of the metal underpinning the shares is allocated in London.

We estimate that as of last week there are around 68.65 moz of gold and about 687.57 moz of silver held in ETFs globally. Our database of gold and silver ETFs suggests that, using average gold and silver prices over the past year, about 48.78 moz of gold worth about $60bn and about 427.67 moz of silver worth about $8bn are likely to be held in London to back ETF shares. This is obviously a rough estimate that’s provided here only for indicative purposes.

Looking at changes in ETF holdings vs changes in total vault holdings between July 2016 and the end of the first quarter this year shows that the trend is broadly similar for gold, yet divergent for silver. Considering the period as a whole, the divergence continues for silver with total holdings up by 8% or 79.89moz, but ETFs down 3% or 12.06 moz. For gold, the change in total stocks vs the change in ETFs also diverges when the entire period from July 2016 to March 2017 is taken into account – total loco London gold inventories increased by a modest 2% or 5.34 moz but ETF holdings were down 8% or 3.87 moz.

Given the data series is quite short, it is challenging to form any strong conclusions at this juncture. We expect that as the series extends in time we will be able to gather more insights from these flows. Intuitively, divergences in total London gold stocks and ETF holdings could reinforce other indicators that suggest declines in ETF shares do not always reflect net exit from gold or silver exposures. Instead, outflows from ETFs could represent a switch to different forms of exposure such as allocated or unallocated accounts.

Tracking gold trade flows vs changes in London stocks

Comparing total gold holdings data with UK gold import and export flows confirms a strong link between the two, regardless of whether one is using UK trade data or what may be implied by Swiss Customs statistics. This is intuitive in that net inflows of gold into the UK should understandably translate into a build in holdings, while net outflows would suggest a reduction in overall levels. In addition to UK trade statistics, Swiss data on gold flows from and to the UK is also a useful indicator of how much gold is leaving or entering London vaults. Given Switzerland’s key role in global gold refining, it is an important hub for the movement of metal and essentially acts as an interface between investment demand in Western markets and consumer demand in Asia. Combining Swiss and UK trade data with London vault holdings allows for a more complete picture.

Periods of strong physical demand out of key markets such as India and China could attract the movement of large investment bars sitting in London vaults to Switzerland for conversion into kilo bars. These gold kilo bars would subsequently be shipped to physical buyers in Asia and ultimately be converted into jewellery or other investment products to meet consumer demand. Net outflows of gold from the UK should coincide with declines in vault holdings in this case. In fact, this scenario occurred back in 2013: as the Fed"s taper tantrum led to a sharp rise in US real rates, gold collapsed by 29% as investors exited gold exposures. In turn, the sharp drop in the gold price made it very attractive for physical buyers, especially in the context of a decade-long bull market. Investor gold positions held in London vaults – whether OTC or ETF-related – were being heavily liquidated. This metal then made its way to Switzerland, was converted into kilo bars, and shipped to Asia to satisfy the surge in demand in China, India as well as other parts of the region.

Interestingly, LBMA data shows that in Q3 last year, the opposite occurred – the UK was a net importer of gold and vault holdings increased. This coincided with weak physical demand for most of last year, which was more than offset by a pickup in investment interest. Given strong demand from the investor community, gold still managed to rally 8% in 2016 (and as much as 30% from trough to peak) despite the weak fundamental backdrop. Towards the end of the year, market forces became conducive for gold to once again leave London vaults and be shipped out of the UK. Investors unwound positions in anticipation of the first Fed rate hike, while at the same time, seasonal and regulatory factors in key markets boosted physical demand, allowing buyers in Asia to absorb the liquidation from Western investors. Demand out of China kicked in heading into year-end, in anticipation of the Lunar New Year holidays, while the demonetisation of highvalue banknotes in India led to a knee-jerk spike in demand. So far this year, physical markets have been more stable, while investment demand has been positive yet broadly more subdued. As mentioned earlier, the data tends to reflect this, with changes in loco London gold holdings relatively  limited during the first quarter of 2017.

A marginal benefit of this link between vault holdings and trade flows is that there is a shorter lag in trade data reporting. This means that trade statistics should help market watchers anticipate changes in loco-London inventories before getting confirmation a couple months later from the LBMA report.

Insights on investment activity

Looking at the entire data series from July last year to March this year, an observation that"s worth noting is the modest 2% increase in total gold holdings equivalent to around 166 tonnes. This change is likely a function of investor liquidations in Q4 2016, as markets anticipated a Fed rate hike, which has since reversed but at a subdued pace. This also coincides with ETF flows – heavy liquidations towards the end of last year have been succeeded by net inflows this year, but volumes lag considerably compared to the same period in 2016.

More importantly, according to LBMA data loco London gold holdings during Q1 this year were relatively flat. This coincides well with the broadly limited investor participation in the gold market that we have been highlighting. Many investors are keeping an eye on the gold market and continue to appreciate gold"s value as a diversifier in a portfolio, yet few have been actively involved in putting on meaningful, strategic positions. Subdued investor participation has been an important factor holding gold back, in our view, in spite of supportive macro factors.

Subdued investor activity has been apparent in speculative positioning data indicated by the CFTC Commitment of Traders Report as well as gold ETF flows. In June, sentiment towards gold understandably came under pressure given the rise in real rates – not just in the US but also in Europe – and the seemingly hawkish shift in tone among central banks (see Gold falls as real rates rise). As of early July, CFTC data showed that gold net longs on Comex had fallen to the lowest levels since January last year. Despite the rebound in gold prices in recent weeks, net speculative positions on Comex have remained very lean. Meanwhile, gold ETFs marked the first month of net outflows in July. Although gold ETF holdings are up on a net basis year-to-date, the increase is much more subdued at only 107 tonnes compared to over 598 tonnes during the same period in 2016. Changes in gold positioning on Comex and ETF holdings coincide with the subdued changes in loco London gold inventories.

As mentioned earlier, the data shows a larger increase in silver vault holdings vs gold. Relative speculative positioning between gold and silver on Comex similarly shows a stronger build in investor positions in silver than gold, at least during the first half of the year. Given silver"s large industrial demand component, it initially attracted some attention on the back of growth and risk optimism amid the reflation theme. This translated into persistent gains in Comex investor positioning, which reached a fresh all-time high in May. Yet as fiscal stimulus hopes faded and reflation trades were unwound, so did the interest in silver. Comex positioning has since given back about 81% from the highs, mainly driven by a strong increase in gross short positions, which have been reaching record highs in recent weeks. It would be interesting to see Q2 and Q3 data on loco London silver holdings to find out whether OTC positions followed a similar trend. Loco London silver holdings could potentially be relatively more robust than what Comex speculative positions imply. Silver ETF holdings have generally been resilient over the past few years, despite heavy liquidations in gold ETFs, which could mean that silver OTC positions could also show a similar sense of stability.

Finding clues on positioning from BoE gold data, for now

Given that only limited historical data is available, it is difficult to put total London gold inventories fully into perspective. For instance, we cannot compare current levels versus the amount of gold and silver held during the peak of the bull run nor during the trough reached at the end 2015. However, for gold we can look to BoE vault holdings, which go back to 2011, for some hints. Based on LBMA data, the BoE accounts for the bulk of loco London gold inventories, representing about 68% of the total on average over the period covered. As the LBMA data series extends up ahead, we should be able to have a better idea of how closely linked trends in BoE and non-BoE gold are, and in turn get a better perspective on investor positions.

The amount of gold held at the BoE was at a high of 6,250 tonnes or 200.50 moz in February 2013 and fell to a low of 4,693 tonnes or 150.87 moz in March last year. As of end-Q1, levels are about 8% or 12.49 moz higher at 163.36 moz, but still considerably below the highs. As we argued earlier, the BoE"s gold holdings likely mainly reflect official sector positions. Some central banks manage their gold reserves more actively than others while there have been a few such as the Bundesbank which have repatriated gold held in various foreign locations over the past few years. These flows are likely also reflected in the BoE"s data. Nevertheless, the BoE does hold some gold custody accounts for certain commercial banks. To the extent that non-official sector gold holdings influences these flows, the trends should be broadly similar to changes in loco London gold held in other vaults. The trend in gold holdings would in this case be consistent with our view that exposure to gold has been reduced considerably from the highs during the peak of the bull run. And although investment interest has been revived over the past year and a half, levels of exposure likely remain limited by historical standards. Much leaner positioning is one of the key factors supporting gold this year and suggests that there is ample room for positions to be rebuilt against a backdrop of benign rates, soft dollar and lingering uncertainties.

"Psycho"

Gold remains inside its 5 year wedge with no clear trend yet revealed.

But there are a number of near-term potential catalysts such as the German Elections, Debt Ceiling Debate & Commitment of Traders positioning  which may help give some clarity.

In the meantime, "People are literally losing their minds.”

So says Santiago Capital"s Brent Johnson in this clip regarding gold, global markets and cognitive dissonance.

 Whether it"s those on the Left that cannot handle Trump in the White House, or those on the Right who can’t understand how CNN is still in business.  Whether it"s the gold bugs who can’t understand why gold is not over $10k/ounce, or the equity bears who think equities are overvalued by at least 50%.   They cannot reconcile the fact that their minds are saying one thing while simultaneously trying to comprehend the information being broadcast on their T.V.s and computer monitors.

Tracing the source of this cognitive dissonance back to the real “Seven Psychopaths” (voting members of the FOMC), Johnson asks you to just listen (and keep an open mind) to see whether you are guilty of psychotic thinking as well.

While referencing characters from real life and the movies,  Johnson wonders whether the bears are overly focused on the equity market (symptom) rather than where the real psychos are focused, which is the bond market (problem). 

And also wonders, based on studies showing that “The feeling of knowing” is based on an involuntary brain mechanism much like lover or anger, is it reason or biology that is determining our opinions on the markets?

Johnson believes the danger that most people don’t see is in interest rates.  And whether due to a currency crisis, sovereign debt crisis, or the simple forgiveness of G20 sovereign debt,  rates may very well rise further and faster than most currently see possible. 

In the end, fundamentals always win.  But in the short term, markets are Psycho.

The Crowd Sometimes Gets It Right

Authored by Kevin Muir via The Macro Tourist blog,

Over the past quarter, the Euro currency has rallied a little more than 9%. It’s been a steady slog higher, with barely a pause.

Have a look at the ranking of the major currencies’ performance against the US dollar over the past few months.

It’s all Euro (or pseudo-European) currencies at the top.

And this hasn’t gone unnoticed by traders.

Back in April, speculative traders were leaning short the Euro. But that’s changed, and now the net spec position of Euro currency futures traders at the CME is sitting at the highest level since 2010.

It’s suddenly de rigueur to be all bulled up about the Euro.

And I am sure you can see where I am going with this… After all, something is straight up on a stick, speculative positioning is at extreme levels - of course I am going to be an idiot and try to short it.

Yet, as some of my more astute readers have correctly noted, just because the Commitment of Traders (COT) report is showing extended speculative positioning, doesn’t mean they will be wrong.

Yeah, can’t disagree. Shorting something because it has risen a long way is just plain amateur hour, even if the trade appears crowded. Sentiment extremes only matter at turning points. During the meat of the move, the specs often get it right.

Or at least that’s what we’ve been taught. Yet, I can’t forget all the times over the past few years when I let a good trade (that happened to be crowded) “cook” because of this wisdom, only to find it fall back in my face. If we are indeed at the start of a major EUR move, then I concede that the EUR will become technically overbought, the specs will get long (and only become longer) as the trade relentlessly rises.

But I am not so sure we are about to embark on such a prolonged bull market. I think it is much more probable that the US dollar chops around in the next few months. And if that proves to be the case, then this scenario offers a compelling short opportunity.

Especially when you consider that the EUR currency seems to have run ahead of one of my favourite measures, interest rate differentials.

The German 10 year bund/US T-note spread has recently been tracking the Euro currency quite closely. But that relationship has bent a little during this recent period of EUR strength.

As many of you are aware, one of my favourite trades is short German bund futures/long US t-note futures. The yield spread has risen from the absurd 235 basis points to 172 bps, but I think it still has some room to run.

I am combining these two trades, shorting EURUSD into this spike, but also adding to my short bund/long T-note position.

If you have a look at the regression analysis over the past couple of years, the EUR overvaluation becomes obvious.

There is nothing saying this relationship cannot change. If we are about to enter into a secular monster EUR bull market, then this spread will most likely blow out. But again, I am betting we aren’t about to experience that sort of dramatic shift (at least not yet).

I was looking for an excuse to add to my short bund/long T-note position, and shorting Euro against it looks like the perfect reason. Now maybe I am getting too cute. Maybe I will get my ass handed to me fading this sort of strength. But I just can’t help it. I hate crowded trades, and when I see a chance like this, I need to write some pink tickets.

When the EUR continues to rally in my face, feel free to remind me that the crowd sometimes gets it right.

Why A Dollar Rebound May Be Imminent Even As Crash Insurance Costs Hit Nosebleed Levels

Is the bottom in for the dollar yet?

After hitting a 14 month low, the Bloomberg Dollar Index saw a modest gain of 0.1% as markets awaited this week’s FOMC meeting and kept a wary eye on Capitol Hill hearings which involve close members of the Trump administration. Quoted by Bloomberg, traders described flows as modest amid the elevated event risk we laid out earlier this morning. Besides another potential surprise from the suddenly dovish Fed, traders were keeping a weary eye on Capitol Hill hearings Monday and Wednesday that include Jared Kushner, Donald Jr and Paul Manafort, and what these could mean for Trump"s fiscal agenda. At the same time, the Fed is expected to keep rates and policies on hold, though it may elaborate on balance-sheet reduction or the timing of any future rate increases.

To be sure, negative sentiment against the dollar has been pervasive, and as we noted yesterday when looking at the latest CFTC Commitment of Traders update, net specs are now the most short they have been the USD doing back to 2013.

Worried that the decline in the USD may continue, Bloomberg writes this morning that FX traders are now paying the most in since October 2009 for options to protect against an extreme decline in the dollar against the euro over a six-month period: the 10-delta risk reversal, an indication of trader bias in the options market, reflects expectations that any move in the euro would be dramatic.

Additionally, traders are also piling into options contracts in anticipation of big moves in the euro-dollar exchange rate, eyeing the critical resistance level, the $1.1714 high from August 2015. According to Bloomberg calculations, traders bought more than $6 billion in options to sell dollars and buy euros on July 20 and 21, and an additional $3 billion to sell the greenback against the yen, according to DTCC data.

However, a more nuanced look at who is trading the dollar, suggests that the plunge may be ending.

Citi"s FX quant desk writes that as real money became strong net sellers of USD, hedge funds became aggressive net buyers for the first time in months "a sharp increase in conviction over previous weeks." Looking at the 1-month cumulative investor flow, shown on the right hand side, this divergence became clear in the ladder half of last week, following the EURUSD reaction to the ECB meeting.

Some more context: USD is currently the second largest short position among real money investors in G10 overall, with both 1-week and 4-week net flow decidedly negative. So far in July, real money clients have been net sellers on 80% of days, a continuation of the long-term bearish run for the greenback.

On the other side of the real money, hedge funds were net buyers of USD last week, mostly due to a large amount of buying in response to USD depreciation in the immediate aftermath of the ECB meeting last week. Hedge fund flow on the day of the meeting was sharply against the EURUSD move, with hedge funds strong buyers of USD and sellers of EUR on the day.  Looking at current 4w aggregated flow, leveraged investors are likely long USD and short EUR, a sharp contrast from the significantly short real money positioning. 

According to Citi, "this divergence between leveraged and real money flow opens up the possibility that real money will follow, and we could see USD appreciation in the coming weeks."

* * *

Finally, here is Bloomberg commentator Marc Cudmore, predicting that a Dollar bounce is imminent.

It’s the question on every trader’s lips because the answer influences the price of almost all other financial assets: When is the dollar bouncing? I see it making a short-term base this week.

Financial assets rarely sustain a straight line move even when it appears fundamentally justified. And dollar depreciation is certainly logical.

However, the last leg down has mainly been driven by the latest political turmoil and that’s a problem for bears. Apart from the macro consequences of Trump’s fiscal program being priced out (which already happened months ago), the direct impact of U.S. politics on markets this year has only ever been fleeting. So the latest ructions change little apart from negative headlines.

Euro strength has facilitated the broader dollar depreciation trade but that theme is also looking vulnerable in the short-term. Consensus has suddenly turned bullish on the euro at a time when the ECB just sounded unexpectedly dovish and EUR/USD is facing multi-year resistance at $1.1714.

For the Bloomberg Dollar Spot Index, both daily and weekly RSIs are looking stretched on the downside as we enter a week with an obvious potential catalyst in the FOMC meeting. Profit-taking will surely be too tempting especially as we get deeper into summer holiday territory.

A bounce of a couple of percent won’t derail the long-term macro downtrend that started in January. The U.S. still has a current-account deficit combined with a large debt pile that’s backed by negative real yields. And the currency remains expensive based on PPP metrics.

But those are long-term structural issues. For the next couple of weeks, the vulnerable side will be for dollar strength.

Is the COMEX Rigged?

Submitted by Ronan Manly, BullionStar.com

The COMEX gold futures market and the London OTC gold market have a joint monopoly on setting the international gold price. This is because these two markets generate the largest ‘gold’ trading volumes and have the highest ‘liquidity’. However, this price setting dominance is despite either of these two markets actually trading physical gold bars. Both markets merely trade different forms of derivatives of gold bars.

Overall, the COMEX (which is owned by the CME Group) is even more dominant that the London market in setting the international price of gold. This is a feat which financial academics ascribe to COMEX being a centralized electronic platform offering low transaction costs, ease of leverage, and “the ability to avoid dealing with the underlying asset” (i.e. COMEX allows its participants to avoid dealing with gold bars). Because of these traits, say the academics, COMEX has a ‘disproportionately large role in [gold] price discovery”.

Over 95% of COMEX gold futures trading is now conducted on CME’s electronic trading platform Globex, with most of the remainder done on CME’s electronic Clearport, where futures trades executed in the OTC market can be settled by CME. Next to nothing in gold futures is traded any more via pit-based open outcry.

Open Outcry: A distant memory for gold futures trading on COMEX

The existence of gold price manipulation in the London and COMEX gold markets is well documented, it is hard to refute, and it has presented itself in many forms over the recent past. Examples include:

• Bullion bank gold traders in the late 2000s colluding in chat rooms to manipulate the gold price as documented in current consolidated class action law suits going through New York courts

• Barclays Bank manipulating the London Gold Fixing price in 2012 so as to prevent triggering option related pay-outs to Barclays clients

• Recent CFTC (US Commodities regulator) prosecutions of futures traders on the CME for ‘spoofing’ gold futures orders

• Flash crashes in gold futures prices which have no underlying explanation to, or connection to, events and developments in any physical gold markets

This last point, ‘flash crashes’ in gold futures prices, is particularly relevant for COMEX. Many readers will recall reading about one or more of these COMEX gold futures price ‘flash crashes‘ during which large quantities of gold futures are shorted in a concentrated interval of time (e.g. within 10 or 20 seconds) which causes the gold price to completely collapse in free fall fashion over that very short period of time.

For example, on 26 June this year, the COMEX gold price free fell by nearly 1.5% within a 15 second interval, amid a huge spike in trading volume to more than 18,000 August gold futures (56 tonnes of gold) during the 1-minute period around the crash event.

On January 6, 2014, the COMEX gold price fell by over $30 in a few seconds, from $1245 to $1215 on huge volume, forcing the CME to introduce a temporary trading halt.

On April 12, 2013, aggressive selling of gold futures contracts representing over 13.4 million ounces (more than 400 tonnes of gold) hit COMEX gold futures in two waves during the London morning trading session sending the gold futures price down by more than 5%. The following Monday, April 15, 2013 the COMEX gold price rapidly fell by another 10%.

Whether these flash crashes are the result of trading errors, futures market illiquidity, computerized trading patterns or deliberately engineered moves is open to debate. Engineered price takedowns, where an entity initiates an order with the intention of moving the futures gold price in a downward direction, are distinctly possible.

However, concentrated gold futures shorting over tiny time intervals doesn’t have to be in the form of one large trade or a series of relatively large trades. All a shorting tactic of this type has to do is to either trigger the price to move down through certain thresholds which then triggers stop-loss orders, or to trigger and induce trading reactions from trading algorithms that monitor gold futures prices. Once sentiment is damaged through rapid downward price movements, the result can affect gold futures trading sentiment for the rest of the day and indeed over subsequent days.

But beyond the possible or probable individual acts of price manipulation on the COMEX, it is important to realize that the very structure and mechanics of the COMEX create a system in which gold futures trades can be executed in large volumes in a virtual vacuum which has no connection to the physical gold bullion market, no connection to gold bar and gold coin wholesalers and retailers, and which doesn’t even have any connection to the vaulted gold residing within the COMEX approved vaulting  facilities (aka COMEX warehouses aka COMEX vaults).

These underlying mechanics of COMEX, which are discussed below, allow the generation of massive gold futures trading volumes and open interest, huge leverage and large non-spot month position limits, a high concentration of speculative trading by a small number of banks, and a lack of transparency into the gold ‘delivery’ process. And at the foundation of the system, there are very small physical gold holdings in the COMEX approved vaults.

COMEX 100 oz gold futures, USD Price, Volume, and Open Interest: 8 months-to-date. Source: www.GoldChartsRUs.com

The Mechanics

COMEX gold futures contracts are derivatives on gold. Importantly, a COMEX gold futures contract comes into existence any time two parties agree to create that contract. This means that COMEX gold futures contracts can continue to be created as long for as there are interested buyers (longs) and sellers (shorts) willing to bring these gold futures contracts into existence.

Therefore, there is no hard upper bound or supply limit on the amount of gold futures contracts that can be created on COMEX. This is very similar to the unit of trading of gold in the London market, i.e. unallocated gold, which is also a derivative that can be created in unlimited quantities. In both cases there is no direct connection to real physical allocated and segregated gold bars.

Technically, the value of any futures contract is derived from the value of its underlying asset, and in this case the underlying asset, nominally anyway, is physical gold. But perversely in the global gold market, the value of the gold futures is not being derived from the value of the underlying asset (physical gold). Instead, the value of the world’s physical gold is now being consistently and continually derived via this out-of-control and unhinged gold futures trading.

Contractually, COMEX 100 ounce gold futures contracts (COMEX code GC) are futures contracts that offer a physically deliverable option, i.e. to deliver/receive 100 ounces of minimum 995 fine gold (in either 100-ounce gold bars or 1 kilo gold bars format) on a specific future date.

However, the vast majority of COMEX 100 ounce gold futures are never delivered, they are offset (closed out) and cash-settled, or else they are rolled over. Only a tiny fraction of these gold futures contracts are ever ‘delivered’. Again, this is similar to unallocated gold in the London market, which is a cash-settled gold derivative.

COMEX is also a speculative market, where leverage (due to the use of trading margin) is used to create outsized trading volumes, and where initial position limits for individual traders are far larger than the quantity of underlying gold being stored in the COMEX approved vaults.

These factors combine to create what is in effect a Las Vegas type casino. This casino encourages vast speculative trading of futures which will never be delivered, and vast shorting (selling) claims on large quantities of gold which a) the shorter does not possess, b) are not even stored in the COMEX system, and c) are many multiples of annual gold supply). Conversely, the buyers are going long on claims on gold which will a) will never be delivered and b) which nearly none of the trading counterparties even wants to have delivered. The players in this casino have no interest in secure gold storage or allocated gold bars or bar brands or bar serial numbers. After all, as the academics put it, the COMEX provides “the ability to avoid dealing with the underlying asset”.

Even when COMEX gold futures for used for hedging purposes, much of this hedging is by bullion bank traders so as to hedge unallocated London gold using COMEX futures, i.e. hedging cash-settled paper bets with cash-settled paper bets. And both sets of instruments structurally have nothing to do with the real physical gold market.

Even back in December 1974, when COMEX gold futures were about to be launched (and which coincided with a lifting of the ban on US private ownership of gold), a group of major gold dealers in London including 3 of the 5 primary London gold dealers, i.e. Samuel Montagu & Co, Mocatta & Goldsmid, and Sharps Pixley & Co, told the US State department that they believed that this new gold COMEX futures market would dwarf the physical gold market i.e. “would be of significant proportion, and physical trading would be miniscule by comparison“.

These dealers expected that “large volume futures dealing would create …. a highly volatile market” whose “volatile price movements would diminish the initial demand for physical gold” that the US Government feared from the lifting of the gold ownership ban.

In hindsight, it was perceptive and prophetic that these major participants of the then fully allocated gold market in London in 1974 saw that the introduction of gold futures would create what we are seeing now, i.e. huge trading volumes, high price volatility, and a market (COMEX) which has an adverse effect on pricing in the physical gold market.

Trading Volume Metrics

Two revealing trading metrics for COMEX gold futures are trading volumes and the “Open Interest” on gold futures contracts. “Open Interest” simply means the number of gold futures contracts that are outstanding at any given time that have not been closed or delivered.

For 2016, COMEX gold futures trading generated a trading volume of 57.5 million contracts, representing 178,850 tonnesof gold. This is nearly as much gold as has ever been mined in the history of the world, i.e. which is estimated to be 190,000 tonnes. This COMEX trading volume in 2016 was also a whopping 37% higher than in 2015. In 2016, while 57.5 million gold futures contracts traded, only 71,380 COMEX gold contracts were ‘delivered’. This means that only 0.12% of COMEX gold contracts that traded in 2016 were ‘delivered’.

Delivered in this context means that the delivery option on the contract was exercised and a warrant representing 100 oz of gold on that contract changed hands, i.e. title documents to gold were shunted around a COMEX/vault recording system, mostly between bank holders. Delivered does not mean gold was withdrawn from a COMEX approved vault and delivered to an external location. The concept of gold vault withdrawal numbers, which is a bread and butter metric for the physical Shanghai Gold Exchange (SGE), is totally alien to the COMEX and its trading participants.

Number of gold ounces delivered on COMEX in 2017: 1.23 million ounces = 38 tonnes. Source: www.GoldChartsRUs.com

For the first six months of 2017, trading volumes in the main COMEX gold futures contract (GC) reached 32.7 million contracts, representing 101,710 tonnes of gold. This was 12% up on the same period in 2016. When annualized, this suggests than in 2017, COMEX is on course to trade more than 200,000 tonnes of gold, which will be more than all the gold ever mined throughout history.

In the first half of 2017, only 12,320 gold futures contracts (representing 38 tonnes) were delivered on COMEX. This means that from January to June 2017, only 0.037% of the COMEX gold contracts traded in that six month period were ‘delivered’, or just 1 in every 2650 contracts traded.

Open Interest

Beyond the trends and snapshots that trading volumes provide, COMEX Open Interest shows how much real physical gold would be needed if all longs who hold gold futures contracts decided to exercise every contract into the 100 ounces of physical gold that each contract supposedly allows for.

For example, currently there are 480,000 GC gold futures contracts outstanding on the COMEX, each of which represents 100 ounces of gold. This means that buyers of the contracts are long 480,000 contracts, and sellers of those same contracts are short 480,000 contracts. With each contract worth 100 ounces of gold, this is an open interest of 48 million ounces (1500 tonnes) of gold, which is about half a year’s global gold mining output.

Currently 46% of this open interest is in the front-month August 2017 contract (nearly 750 tonnes), with another 40% in the December 2017 contract. Together the August and December contracts represent over 85% of the current open interest. During 2017, open interest has fluctuated roughly between 400,000 and 500,000 contracts at any given time.

Registered Gold Inventory and Eligible

However, there are only currently 22 tonnes of ‘Registered gold’ in the COMEX approved vaults in New York, which is equivalent to about 700,000 ounces. What this means is that there are only 22 tonnes of gold currently in the vaults that the vault operators previously attached warrants to as part of the COMEX futures delivery process. This 22 tonnes of gold, if it was held in Good Delivery gold bar format, would only occupy one small corner of one of the COMEX’s 8 approved gold vaults when stacked 6 pallets high across 3 stacks, and another 4 pallets in an additional stack. That’s how small the COMEX registered gold inventories are.

The amount of Registered gold backing COMEX futures gold trading is also at a 1-year low. For example, in August 2016 there were 75 tonnes of Registered gold in the COMEX vaults. Now there’s only 30% of that amount.

COMEX Registered gold inventories: 700,000 ounces = 22 tonnes. Source www.GoldChartsRUs.com

There is also no independent auditing of the gold that the COMEX reports on its registered and eligible gold inventory reports. So there is no way of knowing if the COMEX report is accurate. For example, HSBC claims to have 165 tonnes of eligible gold and a measly 1.5 tonnes of registered gold stored at its COMEX approved vault. This vault is located in the lower levels of 1 West 39th Street in Manhattan (the old Republic National Bank of New York vault). However, I heard from a former New York Fed senior executive that HSBC don’t keep a lot of gold in this Manhattan vault since they moved a lot of it to Delaware after 9/11 for security reasons. If this is true, then the question becomes, on the COMEX report, does the total for HSBC represent the amount they have in the midtown Manhattan location, or the total in midtown and Delaware (assuming they have gold stored in Delaware).

COMEX approved vaults also report another category of gold known as ‘Eligible’ gold. This ‘Eligible’ gold is unrelated to COMEX gold futures trading and could be owned by anyone, for example owned by mints, refineries, jewellery companies, investment funds, banks or individuals, who would just happen to be storing this gold in the New York vaults that the COMEX also uses, such as the Brinks vaults.

In other words, this ‘eligible’ gold is merely innocent bystander gold that just happens to be stored in the COMEX approved vaults in the form of 100-ounce gold bars or 1 kilo gold bars. At the moment, there are 243 tonnes of this eligible gold in the vaults. But this gold is not involved in COMEX gold futures trading. Some of this gold is probably owned by banks that engage in COMEX gold futures trading because there are sometimes movements of gold from the eligible category to the registered category, but still, as long as it’s in the eligible category, this gold does not have any COMEX related warrants attached to it.

With an Open Interest of 1500 tonnes of gold on COMEX, and with registered gold in the New York vaults totalling only 22 tonnes, this means that there are currently 68 “Owners per Ounce” of registered gold. The holders of allocated gold bars stored in a secure vault, such as BullionStar’s secure vault in Singapore no not face this 68 owners per ounce problem, as each gold bar is owned by one person and one person only.

Since the beginning of 2017, this COMEX “owners per ounce of registered gold” metric has risen sharply, more than doubling from under 30 owners per ounce to the current ratio of 68 owners per ounce. This is because registered gold inventories have fallen sharply over this time.

Even adding into the equation all the eligible gold in the New York vaults, which is a calculation that doesn’t really mean much given the independent nature of eligible gold, there are still 5.7 “owners per ounce” of the combined COMEX “eligible and registered gold” total.

The physical gold foundations to the entire COMEX gold futures trading process are therefore very tiny in comparison to COMEX trading volumes and open interest. And all the while, gold futures trading volumes continue to rise, owners per registered ounce of gold continues to rise, and the amount of physical gold backing these contracts on COMEX continues to shrink.

The Dominant Players

The latest Commitment of Traders (COT) report produced by the US Commodity Futures Trading Commission (CFTC), for 11 July, includes market concentration data for the percentage of contracts held by the largest holders. This COT report currently shows that “4 or Less Traders” are short 35% of the COMEX GC gold futures open interest, while “8 or Less Traders” are short a combined 51% of the open interest. Note that the “4 or Less Traders” are a subset of the “8 or Less Traders”.

The CFTC also publishes a Bank Participation Report (BPR) showing metrics for banks involved in gold futures trading. The latest BPR for 11 July shows that 5 US banks are short 78063 contracts (16.4% of the total open interest), and 29 non-US banks are short another 67,373 contracts (14.2% of open interest). In total, these 34 banks were short 145,000 contracts or 30% of the open interest. The same banks were long 40,688 contracts, so were net short 105,000 contracts.

CFTC Bank Participation Report (BPR) of COMEX (and ICE) gold futures positions. Source www.GoldChartsRUs.com

Neither the COT report nor the BPR report reveal the identity of the ‘traders’ or the ‘banks’ that hold these concentrated large positions because the bank friendly CFTC choses not to do so, but even without their identities being revealed, it’s clear that a small number of entities are dominating trading of the COMEX gold futures contracts.

When is a Delivery not a Delivery?

The COMEX delivery report is known as the “Issues and Stops Report”. This report ostensibly shows the number of contracts that were ‘delivered’ on the COMEX each month, but in reality just shows a series of numbers representing the quantity of title warrants (to gold bars) that were shunted around each month between a small handful of players.

The COMEX does not publish any gold bar weight lists of registered or eligible gold inventories held in the COMEX approved vaults. It is therefore impossible to check to what extent the same gold bars or some of the same gold bars are moving back and forth between a few parties over time. On an annual basis, each COMEX approved vault must conduct a precious metal inventory audit on behalf of the COMEX and file this audit with the COMEX within 30 days of completing it. However again, the CME Group does not publish these inventory audits, which only adds to the existing opacity of the system. Is the registered gold in the COMEX vaults even specifically insured? Who knows, because the COMEX does not divulge such details.

Some of the bank institutions which are prominent on the COMEX gold delivery reports are also some of the same institutions which operate the COMEX approved vaults, e.g. HSBC, JP Morgan and Scotia, and these same names are undoubtedly some of the names underlying the CFTC’s Bank Participation Report given that they are always prominent on the COMEX delivery reports. By the way, these same banks essentially run the LBMA in London and run the unallocated gold clearing system, LPMCL, in the London Gold Market.

As regards, the COMEX’s assignment of delivery for gold futures contracts, this is also out of the hands of a contract holder looking for delivery. When a contract is presented for delivery, it is the Exchange (COMEX) which assigns the delivery to a specific warehouse. Not the contract holder. The contract holder (long) has no say in choosing which New York warehouse that contract will be assigned to, no choice of which bar brand he/she will receive, and no choice even of whether the assigned gold will be in the form of a 10 ounce bar of three 1 kilogram gold bars. But even to the long holder seeking delivery, delivery just means gaining an electronic warehouse warrant issued in the long holder’s name or broker’s name (title to the warrant).

To take real delivery of gold bars (withdrawing gold from one of the New York vaults) that would arise from a COMEX ‘delivery’ is a laborious and discouraging extra step. Armed with a copy of an electronic receipt, the procedure involves the receipt holder directly contacting the warehouse in question and telling them you want physical delivery. How they would react to such as phone call is not clear. My guess is that it would be like visiting the mailroom in a large company, the reaction being ‘Who are you? No one ever comes down here‘.

After navigating the withdrawal negotiations with the vault in question,  the pickup and transport of the gold bars is then organized using one of the list of secure transport alternatives that approved warehouse will allow.

COMEX – Not Designed for Physical Bullion

The COMmodity EXchange (COMEX) is a derivatives exchange that is not designed for buying physical gold, storing or delivering that gold, or even selling physical gold. The COMEX primarily facilitates speculation and hedging, with the delivery option just existing as a little -used side option.

Flash crashes continue to occur but neither the CME nor the CFTC ever publishes explanations for the causes of these flash crashes.

It looks certain that in 2017, COMEX will again smash its gold futures trade gold futures representing more gold than has ever been mined in human history, i.e. more than 200,000 tonnes equivalent.

So far in 2017, only 1 in every 2650 gold futures contracts traded on the COMEX has resulted in delivery i.e. less than 0.038% of the contracts go to delivery. The rest, 99.962% of contracts are cash-settled and closed-out / rolled.

The open interest in COMEX gold futures is currently 1500 tonnes, yet there are only 22 tonnes of Registered gold in the COMEX vault inventories. This means that there are 68 owners per ounce of registered gold.

There is continually a high concentration of short futures positions held by a small number of banks on COMEX. The CFTC doesn’t name these banks. When contract deliveries occur on COMEX, it is not a delivery in the sense of a gold bar movement but is merely a transfer in title of a warrant attached to a bar.

Withdrawal of a gold bar or bars out of the COMEX vaulting network to be really delivered to another location is not straightforward.

Physical Bullion

With the London Gold Market trading unlimited quantities of unallocated gold which the bullion banks create out of thin air, and with COMEX trading gold futures which are also created out of thin air, the disconnect between the world of unlimited paper gold and the world of limited physical gold is becoming ever more stark.

On one side lies paper claims on gold which come into and out of existence through cash-settled market mechanisms. On the other is real physical gold that is segregated, allocated and unencumbered, with full title held by the gold holder. Paper gold ownership is fleeting, speculative and prone to counterparty and conversion risks. Real gold is tangible, has inherent value, has no counterparty risk, and can be securely stored.

When real gold is ‘delivered’ to a gold buyer, it actually is delivered to the buyer to wherever they want it delivered, unlike COMEX deliveries where an electronic warrant is merely updated. When real gold is held in a secure vault, such as BullionStar’s vault in Singapore, the gold is fully-insured and the gold holder has full audit and control.

Unlike the COMEX and the London OTC gold market, the traditional gold buying markets of Asia and the Middle East are markets know the real value of physical gold as a form of money and a form of saving. In the physical gold market, especially in Asia, gold buyers demand high purity gold (9999s purity) in convenient bar sizes such as 1 kilogram and 100 grams, and not the 100 ounce bar size traditionally made for COMEX delivery.

Physical gold buyers want gold bars from trusted and well-known sources, and also want choice and variety for example a cast bar from the German Heraeus refinery, or a highly designed minted bar from the Swiss refinery PAMP. Kilobars and 100 gram gold bars also have the lowest premiums of any bars on the retail market since many refineries compete to supply this segment and the demand is widespread and international. Most kilobars and 100 gram bars have their own unique serial numbers which facilitates tracking and auditing.

As COMEX pursues its record-breaking attempt  in 2017 to trade gold futures representing more than 200,000 tonnes of gold, the disconnect between COMEX and the real world is becoming all too clear. COMEX flash crashes will continue as long as the CME and CFTC let them continue. And many people will continue to believe that these flash crashes were deliberately orchestrated. But at the heart of the contradiction between paper gold and real gold is not whether such and such a flash crash was deliberate. The heart of the contradiction is that the very structure of the COMEX system is detached from the reality of physical gold and such a structure can easily allow flash crashes to happen, some or all of which may be deliberate attempts to rig the gold price.

BullionStar will be exhibiting at the FreedomFest event in Las Vegas, which this year runs from July 19 to 22 at the Paris resort in Las Vegas. For those attending FreedomFest please drop by our stand and say hello (Booth number 321). BullionStar CEO Torgny Persson will also be speaking at FreedomFest at 2:30pm on Friday July 21, on why today’s gold price is not reflecting what’s happening in the world and not reflecting what’s happening in the physical gold market. 

This article originally appeared on the BullionStar website under the same title "Is the COMEX Rigged?" 

Speculators Sour On Gold And Silver

Authored by John Rubino via DollarCollapse.com,

The stars — in the form of smart and dumb money futures contract positions — have once again lined up favorably for precious metals. Here are those positions for gold and silver as of Tuesday the 4th. Notice that speculators (the dumb money) got a lot less optimistic — that is, less long and more short — while the commercials (the smart money) got much less pessimistic.

The closer each group gets to neutral, where their longs and shorts are about equal, the greater the likelihood that metals prices will rise in the subsequent six or so months.

And here’s the same data for silver presented in graphical form. The top bars are speculator longs and the bottom are commercial shorts. When they approach the zero line that’s bullish.

So here we are once again, at the tail end of a grindingly-protracted precious metals correction that has led a lot of people to give up altogether and sell their mining stocks. The next few months should be much better, especially for holders of the junior miners that were caught in the GDXJ downdraft.

Playing this indicator - known as the Commitment of Traders Report, or COT - is of course just a way to pass the time while the real underlying forces affecting precious metals work themselves out.

Those forces - rapidly accumulating debts which leave central banks no choice but to inflate away their currencies - are still accelerating in most places, and the inevitability of mass-devaluation will become clear when the central banks now talking about “interest rate normalization” and “balance sheet reduction” are forced to admit that those things are impossible, and all that’s left is debt monetization as far as the eye can see.

On that day it won’t matter what futures traders - or junior miner ETFs - are doing. The physical precious metals bid will go infinite — that is, big players holding useless cash will buy up all the gold and silver that’s available, at pretty much any price that’s demanded.

[ZH: Additionally, Bloomberg"s MarketLive blog pointed out this interesting relationship. As the volume of negative-yielding debt in the world rises, so it appears demand for "paper" gold picks up and vice versa...]