Bill Murphy writes....re:gold shorts/derivatiFrom Lemetropolecafe.com:
Many Café members sent me Chris Temple’s piece at Kitco entitled, Gold’s Short Position: Part Myth, Part Yesterday’s News
An excerpt:
"Folks, there’s NO WAY the Fed or other central banks would follow their present course without first having largely defused the short position in the yellow metal. I believe they’ve done exactly that over the last year or so. A liquid gold market and time have helped; for instance, J.P. Morgan’s derivative position where gold is concerned has reportedly been reduced by two-thirds since it served as the Fed’s proxy during the 1999 spike."
The entire article may be read at:
https://www.kitco.com/ind/Temple/jun132003.html
Chris Temple does some fine work, but I have to take issue with him on this one. In my opinion, the potential for a gold derivatives price explosion is growing, not diminishing.
Here’s why:
*First of all, the gold derivatives at JP Morgan have not dropped by two thirds since the Washington Agreement. In Q1 2000 they were $67,885 billion. Last quarter they were $37,282 billion, a reduction of a little over 40%. However, all that means is someone else has taken the derivatives risk. We KNOW that has to be the case because the BIS gold derivatives are exploding UP, not DOWN!
*According to the gold industry, most derivatives tied to the hedging activities of gold producers. From calendar end of Q1/2002 to Q1/2003, the gold producers reduced their forward sales commitments by an enormous 647 tonnes, a drop of over 20%. From Q4/2001 to Q4/2002, the notional value of the gold derivatives at the BIS rose dramatically from $231 billion to $315 billion, a rise of 36%. They went up $36 billion in the last half of 2002 alone. This means The Gold Cartel is throwing gold loans/swaps/gold paper at the market to keep the price from exploding and causing a gold derivatives neutron bomb from going off.
*The Gold Cartel learned from the aftermath of the Washington Agreement when gold exploded $87 in a couple of weeks. It was the option volatility and high lease rates that almost caused the gold system to burst. They have made sure there is plenty of gold around this time for leasing and have quieted the market down on rallies, thereby keeping volatilities down.
*However, because of the approximate 1400 tonne annual supply/demand deficit, they are only delaying the inevitable and building in a bigger price explosion. That’s what the huge increase in the BIS gold derivatives number is telling us.
*Far from being in control, the Gold Cartel is gradually losing control and at some point will go into desperate mode. They could be there now.
*If The Gold Cartel weren’t so fearful of derivatives problems, they wouldn’t be so adamant about keeping gold from taking out $370.
*We are not exactly free of gold derivatives problems at the moment. The Newmont/Yandal situation is no minor matter, nor is the class action law suit against Barrick for lying about its derivatives-laden hedgebook.
*Some of the central banks may let certain bullion banks out with a cash settlement, instead of the bullion bank returning the gold. That will not be the case with all the banks. Even if 10 or 20% of the lent gold needs to be returned and bought in the physical market, it will create havoc.
Betting against a coming gold derivatives neutron bomb or gold derivatives banking crisis is likely to be a losing proposition.
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There has been conjecture of late about the gold loans/lingering importance of the gold derivatives/absence of a gold price explosion, etc. Thought this would be a good time to address some of them. This is one email I received:
am hearing from gold analysts that 10,000-13,000 tonnes of leased gold is closer to the actual amount, and 16,000 tonnes which seems very aggressive. This is consistent with 2 factors:
1. $800+ gold taking months/years longer than predicted.
2. If we use the popular figure of 16000 tonnes of gold
loaned/swapped/forward then the numbers don't add up, ie:
-16000t loans/swaps/forwards (unless closer to Veneroso's lower 10000t)
-8000t of US gold not able to be leased due to impurity (apparently)
-3000t of French gold which won't be leased (*)
-3000t in IMF (*)
-2000t from Swiss (*)
- 771t from Netherlands (843t reserves minus 72t loans, ***)
- 750t from Japan (*)
- 600t from China (*)
- 400t from Russia (*)
- 290t from Austria (318t reserves minus 28t loans, ***)
- 200t from Portugal (592t reserves minus 381t loans, ***)
- 111t from UK (314t reserves minus 203t loans, ***)
- 104t from Philippines (266t reserves minus 163t loans, ***)
====
35200t
plus several smaller ones (eg Romania, Australia, Denmark, Finland, Norway),
so let's say:
35500t
======
Now 35,500t is way over the 32,300t (**) of total reserves.
Even if only small amounts of gold required to manipulate in thin New York Access market trading, even that is not possible if there is no gold left to
do so.
How is this possible?
Sources:
www.gold-eagle.com/editorials_03/joubert050803.html
https://www.gold.org/value/stats/statistics/archive/pdf/World Official Gold Howww.gold.org/value/stats/statistics/archive/pdf/World%20Official%20Gold%20Holdings%20Feb%202003.pdf
Thanks
Grant.
Some points:
*Frank thought the actual gold loan number was 10,000 tonnes five years ago. I seriously doubt he thinks they are that low today. Privately, he would tell you they must be closer to 15,000 tonnes.
*10,000 to 13,000 tonnes is still double to almost triple the number estimated by GFMS/WGC. It means the gold loan/swap numbers used by the gold establishment have no credibility.
*How do we know the US still has 8300+tonnes left? There has been no unbiased audit in around 50 years.
*Yes, a good percentage of US gold is coin melt and would have to be refined to be delivered. That would raise a commotion. However, we could have swapped some of our gold for German Bundesbank gold and let it flow into the market. Remember the 1700 tonnes of gold at West Point that was mysteriously re-classified as "Custodial Gold." That is until GATA came along and made a big stink. Months later all the US gold was re-classified again as "Deep Storage Gold."
*How do we know the IMF is not lending/swapping its gold? After all, it instructs its member banks to show its lent/swapped gold as gold reserves. In other words, it requests IMF member banks to lie about the true status of that gold. Gold, which has left vaults, is to accounted for as if it were still there.
*The central bank numbers you cite are probably not accurate. The Portuguese number is off, we know for sure. Fifty one tonnes of swaps is not included in your number and neither is around 45 tonnes the Portuguese recently announced was sold.
*The rising BIS gold derivatives number tell us there is pronounced gold lending/swapping going on. That has to be because the gold producers are reducing their gold derivatives related to forward sales, options, etc.
*The delayed $800+ gold comment begs the question. Gold has not rallied because The Gold Cartel has dumped so much gold into the market to keep it from rising. That is the very reason it will explode as time goes by. They are running out of ammo.
*Reg Howe’s latest, Not Your Father's Gold Market, is a must read on this subject. It was posted yesterday at:
https://www.goldensextant.com/commentary25.html#anchor168813
.....