It appears as if that old adage that a rumor can't be confirmed as being true until its been officially denied several times applies to the London gold bar market, as it was reported last night by a London Metals Exchange reporter that premiums on "good delivery" bars are now above the spot price of gold, something which is rarely observed in London:
Gold Bar Shortage In London Asian and Middle Eastern Central Banks and investors are hoarding an enormous amount of the 400 ounce LBMA "good delivery" bars that make London the largest physical gold trading market in the world. As the price of gold was aggressively manipulated lower by the Federal Reserve and its agent bullion banks since mid-2011, eastern hemisphere sovereign, Central Bank and investment buying - especially the Chinese - intensified.
With negative "gold forward" rates having been negative for a predominant part of the last half of 2013, I was wondering when a shortage of London bars would be reported. A negative "gold forward" rate means that the entity (bullion bank) who is borrowing or leasing the bars today in order to deliver them into buyers will pay more today for the ability to take delivery of bars now than it would cost to buy them for delivery in the London "forward" market - i.e. anywhere from a month to a year from now.
A rare premium for deliverable bars means a shortage of bars for immediate delivery - directly to buyers not using an intermediary like a bullion bank - has developed (as opposed to the GOFO rate, which applies to the brokerage firm intermediaries making markets in bars and who lease gold needed for delivery from Central Banks to deliver into the buyers who are buying from them).
We know that gold being drained from Comex warehouses and the GLD Trust ETF is being used to make good on deliveries into Asia's voracious appetite for deliverable gold. Unless the Federal Reserve (Bank of England and ECB) can tap into new sources of above-ground gold stocks, we could well begin to see delivery defaults.
Over and above the reports of gold shortages from traders and market professionals, there have been other signs of a developing gold bar shortage for several months. Recall the stunt Goldman Sachs pulled about two months ago when it reported in the press that it had reached an agreement with Venezuela to lease Venezuela's physical gold - the gold Venezuela had repatriated in order to safekeep it under its own watch just two years ago. That news item dropped by Goldman turned out to false. Same for the report that Cyprus was going to sell its gold reserves to help pay for its bail-in. That report proved to be false as well.
I always believed that these reports reflected nothing more than desperation by the big bullion banks like Goldman and JP Morgan - as agents for Fed - to get their hands on gold that could be delivered to Asian buyers who demand delivery. Same for the fact it the U.S. refused to give Germany back its gold being held by the Fed as requested and instead agreed to a suspicious deal to ship back part of Germany's gold over seven years.
While I'm sure plenty of skeptics from Australia to New York to will issue well-crafted rebuttals to the view that there is now a shortage of physical gold in London and New York, the report last night that big buyers are paying a premium to get their hands on immediately on physical gold confirms the obvious. Money speaks a lot louder than words in the world of finance - follow the money...
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