Houston -- I’m suffering from a nasty case of “Conference Envy.” While most of my good friends in the metals biz are right in the thick of things at the Cambridge House Resource Conference in Vancouver this weekend, yours truly is figuratively chained to a desk here in Texas with a laptop going over about 80 charts of promising junior miners and explorers, most of which are so low priced they would have to double or triple just to be “cheap.” And, some of which are still trading at their cash value or in some cases even below that.
Oh, yeah, while my buddy Thom Calandra, who writes the rapidly growing Ticker Trax service for Stockhouse, and my good friend Brien Lundin, who pens the highly respected Gold Newsletter are both there hovering in all the interesting happenings, getting the skinny on the latest, best and most promising contenders in the resources arena, some of us have to just do what we can until we can be where the resource action is.
Okay, so I can’t be there to participate, but that does allow time for the oh-so-necessary research. That research fun will have to do for now and there is a lot happening out in the mining company trenches. Meanwhile, while we wait for news and insights from the conference attendees, below is an excerpt of the Got Gold Report, a service to subscribers of GoldNewsletter.com.
Gold thrusts through resistance
Last week we reported that both of the largest gold and silver ETFs reported holding record amounts of gold and silver bars for investors. This week they still are and in the case of gold, the amount of metal added was an eye opener. Details are just below.
By now everyone knows that gold bullishly crossed above a widely-watched technical line in the sand. Spot gold thrust up through implied $870s resistance and kept on going in Friday’s impressive $42.85 upside romp and last traded at $899.62. Silver answered with a 57-cent bump higher closing at $11.98 (Note that both closes were just under important round-number milestones).
We’ll take a closer look at the ETFs, mining shares and the CFTC commitments of traders reports just below, but first one side note.
Elephants maneuvered by mice
Every once in a while we take a look at something not generally on investor’s radar screens. This week we look at how much of the metal is actually in play at the largest futures bourse for gold. We even do a little math for some perspective.
As of Friday, January 23, NYMEX reports that there were 8,538,555 ounces of gold located in all of the COMEX member depositories. Of that amount 2,793,359 ounces were listed as “Registered,” the amount of metal which was actually deliverable against COMEX gold contracts. Some 5,745,196 ounces were classed as “Eligible,” or the amount currently in storage in COMEX depositories, which theoretically could be moved into the Registered column if the rightful owner of the certificates for that metal were so inclined.
The Registered and Eligible descriptions are actually a bit more complicated than that, but for now it’s close enough.
As of January 20, according to the CFTC commitments of traders report, there were 331,507 contracts, each for the future delivery of 100 ounces of gold metal open on the Commodities Exchange or COMEX, division of the New York Mercantile Exchange or NYMEX. The COMEX is the largest bourse where gold, silver and copper futures change hands in the U.S. daily.
All 331,507 open gold contracts on the COMEX means that traders are on both sides, long and short, of paper contracts for the future delivery of about 33.2 million ounces of gold. Remember from above that as of January 23 all the COMEX member depositories had a total of just under 2.8 million ounces, which were deliverable into those 33.2 million ounces worth of contracts. Another way to say that is that all of the gold contracts on the COMEX are currently backed by about 8.4% of the amount of gold those contracts represent.
The COMEX, which largely sets the price of gold metal these days, is doing so with a great deal of leverage. Not just leverage on the contracts themselves, but also in the amount of metal its members can actually deliver. But that gets a little ahead of the point of this exercise. While we get back on point just remember that we have all recently learned an important lesson about leverage from the world’s big banks, and remember that the COMEX is trading 33.2 million ounces of gold on paper while its members can deliver 2.8 million, or 8.4% of that amount.
Onto the next rung of this discussion ladder and some back of envelope ciphering.
GLD gold paid for, not leveraged
SPDR Gold Trust [GLD], the largest gold exchange traded fund, currently holds 832.57 tonnes of gold bars for its investors. (See chart below.) For the most part, investors in GLD have put the full amount in to buy their shares of the trust. Sure, some shares are owned by investors using common leveraged or so-called margin accounts with maybe 50% of their investment borrowed, but GLD investors hold shares of the trust. The gold the trust holds is stored away in custodial vaults in London. Every last ounce of it is held fully paid for, without any leverage whatsoever.
Now GLD’s 832.57 tonnes of gold is 26,768,103 fully paid-for ounces worth $23.4 billion as of Friday’s close. We have to wonder if people really realize that the price of gold is “being set” largely by one bourse, which trades very highly-leveraged paper contracts for the future delivery of 33.2 million ounces it can only actually deliver 8.4% of.
There’s that “leverage” word again. NYMEX-COMEX members can “purchase” or control one gold contract for $6,000 initially. That’s called the margin amount. Non-members have to pony up $8,100 in order to take a position, long or short, in one contract for 100 ounces of gold as of today.
Moving mountains with not much
Again, there were 331,507 COMEX gold contracts open on January 20, so in theory if we just use the member margin requirement, all 33.2 million ounces could be controlled with about $2 billion. Doesn’t that mean that about $2 billion of capital could be pushing around $30 billion of gold futures contracts on the COMEX?
I guess $2 billion is not exactly chicken feed, but in the context of an entire market for what many feel is the most important commodity and the only real money “currency” on the planet, $2 billion isn’t all that much, is it?
Okay, most of the contracts are not expected to actually settle in metal, but instead are expected to be settled in cash one way or another, so normally there really is no need for the COMEX members to have as much gold on hand as there are contracts trading. We’ll stipulate to that. But are these normal times?
What would happen if more than the normal number of contract holders decided to take delivery of their COMEX gold contracts? It’s interesting to contemplate and we can see that it really wouldn’t take all that many players standing for delivery to completely strip the COMEX members of all their Registered gold bars. Right now, for instance, it’s less than 9% of all the open contracts.
For GLD, which has $23.4 billion of fully paid-for gold to be pushed around by a market that trades 33.2 million ounces of very highly leveraged paper contracts but can only deliver 2.8 million ounces and only needs $2 billion at risk to trade them seems a little, well, “bassackwards” does it not?
While we’re at it, why not take it one step farther? In all of recorded history the best estimates are that mankind has produced about 160,000 tonnes of gold and most of it still remains above ground in one form or another. Incidentally, if it were possible to gather it all up into one spot in pure form, all the gold ever mined would fill a cube a little over 20 meters to a side – enough to fill a small movie theater, not enough to fill the average super market.
Leverage levers both ways
Isn’t it curious in the extreme that we have the condition where something like $4.6 trillion of worldwide above ground gold assets are being influenced by a very few large traders, with potentially only about $2 billion in money at risk? More to the point, if one really big trader wanted to, it wouldn’t take all that much capital in order to force a market one way or another for a while.
It’s hard for most folks to grasp numbers in the trillions and billions, but we can use another cipher to understand that leverage by comparison. The price of worldwide gold assets being moved around by about $2 billion of margin in futures contracts is similar to a soccer mom controlling $46 million in futures with contracts costing $20,000.
What’s the point? For all intents and purposes, the action in futures contracts “sets” the price of the commodities in the U.S. The market is very highly leveraged, both in the amount of capital it takes to run the market and in the amount of physical metal available to deliver into the paper contracts that trade. In, uh, “short,” a little capital can go a “long” way in futures.
The COMEX is also a market dominated by a very few, very large traders most of the time. For example, as of January 6, when gold closed at $864.16, according to the CFTC Bank Participation in Futures and Options Market report, just three U.S. banks reported they held net short positions in gold of 80,194 contracts when all commercial traders as a group held 149,482 contracts net short. That means that just three big U.S. banks held a shockingly large 53.65% of all the commercial net short action in gold on the COMEX to begin the year.
As extreme as that sounds, the banks actually held an even larger part of the COMEX net short gold game last month.
So, the next time someone mentions what an ounce of gold is “worth” just remember there is more to the story; more to the ongoing price discovery battle underway than most people will ever know. While each dollar higher or lower in the gold price affects the global market of all above ground gold by about $5 billion, it really doesn’t take all that much more liquidity flowing into or out of the highly leveraged futures markets to make a big difference.
Because of the leverage, both ways.
With all the uncertainty out there right now in the Forex markets; with so many people now very worried about the purchasing power of their paper currencies; with so many new dollars, yen, euro and pounds sterling being pumped into the global banking systems, it really isn’t any wonder that investors are seeking a safe haven in gold. If that continues, some percentage of some percentage of that liquidity will find its way into gold via the futures markets if history is any guide.
And, haven’t the banks, all banks, been under intense pressure lately? Gold has proven its mettle during this global financial crisis so more and more people seem to want some. If the banks actually were in the business of defending overly large short positioning in the futures markets, as some analysts allege and CFTC data supports, perhaps they are falling back to a higher line in the sand they can better defend (with not all that much highly-leveraged capital). We’ll see. Meanwhile, investors are buying the heck out of fully paid-for gold ETFs, physical gold and silver.
Gold ETFs
We continue to note stronger buying than selling pressure in gold exchange traded funds.
SPDR Gold Shares, [GLD], the largest gold ETF, reported adding a very large 37.32 tonnes to show 832.57 tonnes of gold bars held for its investors by a custodian in London. This past week GLD added gold on every trading day. As of the Friday close the metal held by the trust was worth $23.4 billion.
That is yet another record for gold metal holdings by an ETF. Purchases of GLD swamped sales strongly over the past trading week as evidenced by the largest one-week addition of gold metal since September.
Source for data SPDR Gold Trust
So that the price of each share of GLD tracks very closely with the price of 1/10 ounce of gold (less accumulated fees), authorized market participants (AMPs) have to add metal and increase the shares in the trading float when buying pressure strongly outstrips selling pressure. The reverse occurs when selling pressure overwhelms buying pressure.
Barclay’s iShares COMEX Gold Trust [IAU] gold holdings held steady at 68.13 tonnes of gold held for its investors. Gold holdings for the U.K. equivalent to GLD, Gold Bullion Securities, Ltd. added 0.88 tonnes over the past week, to show 120.07 tonnes of gold held.
All of the gold ETFs sponsored by the World Gold Council showed a collective addition of 39.49 tonnes to their gold holdings to 992.50 tonnes worth $28.02 billion.
Clearly as gold found its stride investors flocked into gold ETFs worldwide.
SLV metal holdings
As silver cut both a higher low for the week in the $10.90s Tuesday and a higher high of $12.09 Friday before settling for a last Friday trade of $11.98, metal holdings for Barclay’s iShares Silver Trust [SLV], the U.S. silver ETF, remained flat at a record 7,143.27 tonnes of silver metal held for its investors by custodians in London.
Source for data Barclay’s iShares Silver Trust.
Got Gold Report Charts
1-year daily gold
2-year weekly gold
1-year daily silver
2-year weekly silver
3-year weekly HUI
2-year weekly Gold:HUI ratio
2-year weekly U.S. dollar index
That’s it for this excerpt of the full Got Gold Report. GoldNewsletter.com subscribers enjoy access to all the Got Gold Report technical analysis and commentary as well as Brien Lundin’s timely advice, analysis and specific resource company recommendations.
Until next time, as always, MIND YOUR STOPS.
The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author currently holds a long position in iShares Silver Trust, net long SPDR Gold Shares and holds various long positions in mining and exploration companies.