More Evidence Gold is Being Hoarded as Comex Fulfills Gold Contracts With Paper

My bet that by 2020 we will return to some form of gold standard is looking better. Something is up when gold is being hoarded to such an extent that the futures exchanges cannot fulfill with metal but have to try to stiff the contract holder with paper. Now, they have done this in the past, and gotten away with it, but according to this story, never so aggressively. 

 Prof. Antal Fekete has been on this story for several months, and has set forth in some detail how the gold basis is being manipulated, perhaps because of hoarding. (The basis is the delta between the cash price and the next futures price.) Yves has had several posts on Gold Panic, and it is consistent with the good Professor's analysis. This chart from The Pragmatic Capitalist shows GLD going parabolic, the sign of a bubble. Maybe it is time to take profits?  

Another aspect of this story is the collapse of Barrick's hedging strategy. Barrick is the largest gold mining company and had been following a really dumb hedging strategy which had been to take naked short positions (shorting gold they did not possess). In a world of gold hoarding, they may not be able to cover, even at a loss. The strategy was so risky that a conspiracy theory had evolved that Barrick was front-running the US government to keep the gold price down. Lending support to this is the question: why would a gold production firm try to cap the gold price? An answer which does not require the conspiracy is that Barrick had less gold in the ground than it wanted to reveal, and so was engaged in a confidence game of the first order. The weak Dollar (driving gold up) and the hoarding has called their bluff. 

Gold-backed currencies, unlike fiat currencies, have the irreducible endpoint of debts being paid in gold, which has retained value throughout history. Fiat currencies have no such endpoint. You can make the argument that fiat currencies are backed by the productive capacity of the issuer, and that they have some irreducible value based on taxing that production. History has tested that case, and found it wanting. You see, fiat currencies tempt countries to over-extend. 

What happens when the debts of the issuer are vastly beyond their productive capacity? Well, the country defaults, and the fiat currency is forcibly exchanged for scratch. A 2008 paper by Harvard Professor Rogoff and Prof. Reinhart, both members of the NBER (which calls recessions and recoveries) entitled This Time Is Different demonstrates that instead of fiat regimes making good, they have defaulted over and over throughout eight centuries of financial crises:

We find that serial default [repeated sovereign default] is nearly a universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies. 

Before we take comfort in the US being already an advanced economy, the imperial power of its day has typically defaulted after over-extending. Rich European countries have defaulted, including Austria, France, Portugal Spain and Germany. The reunified German defaulted in 1873, bringing the whole world into a long depression, including the United States. In the last century, Germany defaulted twice: 1932 and 1939. Russia three times, beginning in 1918. England in effect defaulted in 1931. 

So now the gold hoarding makes sense: other sovereign powers are preparing for - or at least hedging against - the inevitable sovereign default of the US. The more Obama buries the US in ever more present deficits and future commitments, the closer this becomes.

Niall Ferguson's piece in Newsweek, which I discussed yesterday, fits into this context. He was talking about Imperial powers getting over-extended, and the first thing that falls is to pullback on excessive defense spending and foolish Imperial wars. Even as Obama pitches tonight a three-year vague commitment in Afghanistan, the hand writing is on the wall. Sadly, the US is so over-extended the wars are but a small pullback in the vast future deficits from social commitments. This won't end well. 

Comments

[rc]

So is gold going up or down? Does EWI / Prechter have it wrong? Is the dollar getting ready for a major turn-around or is the decline just picking up steam and will this cause the nominal price of the Dow and S&P to hit new highs? This would've sounded crazy just a short while ago, but 11,000 is just around the corner. If we get past that, then why not 12,000 and then why not go all the way to a new high?

I don't blame EWI / Prechter because no one has a crystal ball and I believe their analysis is well reasoned and sincere. But... this is the 10th month of the stock rally and gold (wasn't it _not_ to have gone past 1,000?) is holding 1,200 (it sure is taking a 'round-about way to the lower levels expected). Those of us holding cash are just watching our dollars evaporate while major trends are in force.

[graspthemarket]

In addition to your work on gold, I've been watching how silver has reacted to the negative dollar. For clarification purposes, here is the chart: http://www.graspthemarket.com/elliottwave/20091130a.php
To me, the scariest part of all of this is when (notice I don't say if) the dollar turns like we got a whiff of last week, the market appears to be in serious trouble. I said on my daily update, "However, Wednesday, Thursday, and Friday of last week, showed how quickly the dollar can move in the face of fear." Finally, if there is not fear, why has the Dubia market sold off over 11% in two days. Somebody is smelling fear...

[MI]

"Those of us holding cash are just watching our dollars evaporate while major trends are in force." by rc

Thanks to Yelnick for posting a summary on current state of gold.
Sorry to criticize, but Prechter and EWI are not focusing on trends except when suits to their argument. Believe me EWI will change their view on gold and dollar when gold crosses $2000 and dollar closes below 0.69.
You know there is a mad man sitting at printing press with relentless pursuit to destroy a nation's currency. It is evident to anyone who is open minded. The elected leaders are forecasting two trillion deficit per year for ever. They gave $110 billion to GM to save a union. What is the difference between this country and bankrupt Dubai.

Prechter gold target is $680 and Dow 400. Anyone who takes these guys serious is in real trouble, if not already.

[yelnick]

RC, I don't have a take on EWI or Neely's views right now. When a fifth wave extends, or shall I say a move goes parabolic, it is unclear where it will end within wave theory. As Yves likes to say, gold runs like a commodity not a stock, and that means it is driven by fear. My best take is don't watch gold, watch the Us Peso. We have this odd pattern of a sell off of the Dollar Sunday night (or last Wed, or this Monday shifted until end of month). Then a stock move up. The effect is a square wave market - very odd. I am looking to build a post on it, but so far have seen no commentary of why this shape.

My preliminary hypothesis: It looks a lot like someone squeezing the USD: the sell off forces the countries who want to keep their currencies from running up to support the USD. So by end of week it goes back; and then the sell off again. A clever way to push those countries to the edge. This likely ends with a capitulation move down in the USD to around DX70. Maybe Soros is doing his British Pound play 15 years later, this time using the USD to squeeze a lot of Asian currencies - and the Euro. In the meantime gold is being hoarded to hedge against a Dollar collapse. Bernanke of course is stuck. Can't support the USD without trashing the USE (E=economy).

Any reader wish to comment? Or point me to sources that might be forming an opinion on this?

[graspthemarket]

Yelnick,

I understand your connection with the currencies. As of right now, I would agree with your Ben Bernanke assessment "of course is stuck." I've been reading Bernanke's collection of essay's on the Great Depression, and from what I've been able to conclude, I think defending the dollar will be low on his list of things to do for a while. (maybe try that for a read--hey you asked, but it is heavy with economic terms, etc...so for me it is taking a little while.) He is definitely not going to contract the money supply based on what I've read. He doesn't want to be responsible to the Greater Depression. However, as we saw last week in the world, it might not be a US dollar story anymore as much as what could happed in the rest of the world. For example, a country or city defaulting on their debt. I think the assumption of if there is one, there are probably more--applies here. The question is who/what is next to reveal that they don't have enough money. If one the richest (city or whatever Dubai is) can't pay their debt, what about the poor nations, etc.? Thus, as we saw last week, people will rush into dollars because it is a "safe" currency.

Final comment, I read on cncb today something that Dennis Gartman said (I can't stand him, but that is another issue). Anyway, he said, something like...everyone he knows is short the dollar. I think that is revealing because the question then is who is left to short the dollar--my contrarian point-of-view for the evening.

[DG]

The effect is a square wave market - very odd. I am looking to build a post on it, but so far have seen no commentary of why this shape.

It could be a Symmetrical formation.

[joe]

The dollar carry trade is just a bubble waiting to bust open. Grasp is of course right - particularly about everybody and their mothers being short the dollar now. And when it bursts gold will go the same way as our equity markets go, so I doubt the hoarding mentality will last very long in gold.

I do see what you mean about the square wave in this though - but I have never actually seen this happen before and don't know what to make of it.

Joe

[yelnick]

DG, I have never seen a Neely structure like this, even his newer ones. if it continues we will fade down the rest of the week, then have another sell-off Sunday and a big pop Monday.

[yelnick]

Grasp, the case for the USD going up starts with it not really going up but falling less fast relative to other currencies. Yet when the break up occurs, it will be very sharp and fast - a short squeeze. There is a lot of debt in Dollar terms that is NOT backed by Dollar reserves, hence in effect is a short of the Dollar. Think Eurodollars. One spark would be a continuation of defaults outside the US driving a need to cover these shorts due to an expected flight back to the Dollar.

In 1931 we had the second wave of defaults. Looking back at these crises, there tends to be an initial shock (in our case, two Bear funds going down in summer 2007) and it is followed by a secondary crisis (in our case, the Sept Lehman debacle). We had enough time to avoid the second crash, but failed to do so - a failure that should hang Bernanke, the so-called student of the Great Depression. The Austrians warned of this, but of course Bernanke is not an Austrian - he is a modified Keynesian, modified by Friedman.

Bernanke did a good thing in flooding liquidity to avoid multiple Lehman's, but beyond that he still has not done anything to solve the problem that began to be visible in 2007 - counter-party insolvency risk. The blindness of Ben is that he is a student of the GD, and is fighting the last war. Then, liquidity. Now, insolvency. Since he has failed to solve the counter-party risk problem, his liquidity has merely extended the period of grace before the crisis re-ignites. Put simply, we are at huge risk of a second financial crisis in 2010. All he has done is kick the can forward.

If we compare 1929 to 2008, then we should be aware that 2010 = 1931. The second wave of defaults of the GD began with Austria defaulting in April 1931, leading to a series of dominoes, including England going off gold and Germany repudiating the war reparations. History won't repeat that way, but maybe this time out of China. In any event, Dubai is a warning shot across the bow.

[DG]

Yelnick,

Sure, it's not a common structure in my experience, either, but the wave structure fits, so far. If I'm right about how it fits into the wave structure from the November low, it's the B-wave of a Zigzag, which would mean one more run to new highs.

[yelnick]

DG, could be. The past three weeks can count as a flat, or if it breaks one more time down, a triangle. That would fit a 4th wave or B.

[elskid]

"And when it bursts gold will go the same way as our equity markets go, so I doubt the hoarding mentality will last very long in gold."

Joe,
I can't help feeling that ONE of these days, gold will decouple from that sort of "trading vehicle". At that point gold is a currency and is responding to a whole new level of fear (or a better understanding of the true amount and depth of chaos in the world or its systems).

Does that make sense?

[Non blamer, too]

"I don't blame EWI / Prechter"

You shouldn't. They aren't responsible for their horrible, horrible stance on gold. Neither are they responsible for their backtracking on earlier pronouncements they made about higher gold prices forcing them to recant.

It's Voldemoort's fault. He made them speak and write the words they did. And also his evil faeries' fault. They helped.

And it's not like EWI/Prechter charges people for their advice anyway.

[www.facebook.com/profile.php?id=100000373171925]

I am a long-time lurker, but I am so frustrated that I must comment about a couple of things.

First: Everyone is not short the dollar. Monday's release of the Commitment of Traders data showed the speculator category solidly on the NET LONG side of the greenback with the big funds having just this past week moved over to that side after being net shorts since May of this year. The commercials are now the NET SHORTS. It presages a nasty drop in the dollar.

Second: Gold is not be "hoarded" and settled in paper. If you want the real story then take a Two-Week Trial Subscription to LeMetropole Cafe (GATA). These people have nine years of empirical data and have accurately called the gold market since 1999. If you really want to understand the gold/silver markets this is a must.

Link> http://www.lemetropolecafe.com

Third: Gold is not trading as a commodity, it has started trading as a currency. This started last July.

Thank you for listening to a frustrated lurker.

Maxi

[Greg]

I wonder if Mr. P is still double short.

[Sherman McCoy]

Interesting piece, makes me want to buy another rifle and more MRE's. As any real technician will tell you, fundamentals ("The Why") always follow the technicals. Whether gold is being settled for paper is irrelevant. The simple fact is this type of news only occurs in wave 3. Gold going up every day with no retracement is creating a panic for the shorts by the price action alone. Take a Fibonacci multiple as a target and get on board.

As far as Boob(two o's) Prechter being double short, even he will admit he doesn't actually trade the markets. That way he has an excuse for not being in the Forbes 400. Somebody this smart should be rich, right? As for me, I'd rather follow The Soros newsletter. oops, I forgot, great traders don't write newsletters!

[Sherman McCoy]

Check out the KRE - the Regional Bank Index. A truly iconoclastic analyst- Don Coxxe pointed out that unlike the BKX which Bernanke,Geithenr and Co. are manipulating, this must rally for the market to get legs.It's in a triangle right now - don't know the wave count - but the next moves looks up. It might be prudent to wait for that to roll over(as a confirmation tool) before going "double short".

[yelnick]

Maxi, can you cut and paste the relevant part of the newsletter? Not the part that shows great forecasting, but the part that contradicts hoarding and the COMEX fulfilling gold contracts with paper.

[www.facebook.com/profile.php?id=100000373171925]

Yelnick, it is not a newsletter. It is a daily commentary called MIDAS. It is impossible to cut and paste as it comprises many days of commentary/data addressing the tightness in the physical market, with serious doubts that the COMEX Warehouse Inventory Report is even valid.
Please let me clarify what might have been somewhat ambiguous.
Yes, it appears that settlement is being done on a cash basis. In fact, if you look at the Daily Delivery Report it appears that all were cash settled.It is not "hoarding" but rather a lack of physical gold supply. This is why good delivery bars have been showing up with Tungsten and others not to required purity.
I will see if I can find something substantial that I can share with you that provides a public link.
GATA published a report at the beginning of the decade stating when central bank gold being used to suppress the price would be exhausted. The forecast date was 2009 and here we are. Their work has been amazing, but other than an interview on Bloomberg Asia, GATA is banned from the media, with the last appearance being on CNBC in 1999.

Maxi

[Mike McQuaid]

The world's central bankers exercise control over the whole of mankind and don't want money based on gold. They want money based on debt.
For this to change the majority of mankind would have to exercise a collective political will to force gold denominated money. It's not remotely likely to happen, mankind is way too politically fragmented and frankly uninterested in the proposition.

[yelnick]

Maxi, thanks. Maybe you would want to draft a guestpost summarizing their view? Also, would love to understand why not being able to fulfill in metal is NOT due to hoarding going on - why is the metal going underground if not expectation that it is worth more than even current prices.

BTW Prof Fekete in one of the links in my post discusses how the gold hoard at Fort Knox is 22 carat not the standard 24 carat gold brick. This is due to melting down coins in the great gold seizure by FDR in 1933-34. They probably should have re-refined to 24 carat but didn't. It makes it hard for the US to let those bricks out to provide supply.

[PSB]

DG

I am a Neely/Neowave subscriber. Could I get access to your blog somehow?