Looks like India was in serious “buy” mode last night after the London/NY ambush of paper gold.  Per JB’s invaluable report to be found at http://www.lemetrolecafe.com/: 

Indian ex-duty premiums: AM $5.19, PM $5.19, with world gold at $1,339.56 and $1,340.20. Very ample for legal imports…Overnight gold weakness (Dec gold low down $4.90) was primarily an issue of $US weakness – and the strength at present is the obverse. However with Indian premiums at this level, a serious retreat is difficult to envisage. (emphasis is mine)

In addition, the daily open interest report from the CME, found HERE shows that the open interest for gold declined by a surprisingly small 7.7 thousand contracts.  Even more interesting was the fact that the open interest for the February contract actually increased by 3,903 contracts.  This o/i report stands out because historically on a day when gold gets shot by the cartel for $40+, we would typically see a much larger o/i liquidation and would never see any single-month increase.  February is the next “front-month” for gold after December.

In silver, the o/i declined by a surprisingly small 362 contracts. Again, historically on day when silver is hit for a buck, typical o/i liquidation would be 10x that amount.  It would appear to those of us who have been trading/investing/observing the precious metals market for the duration of the bull market that it is possible, maybe probable, that opportunistic dip-buying is being front-run by the competition of a growing number of accumulators (i.e. strong hands) globally looking to increase or start core positions.

www.FinancialArticleSummariesToday.com

Gold, the precious metal most often thought of as money, is in short supply.  In fact, the existing above ground horde is so small one has to question whether it is realistic to think of it as having a serious role as money in the future.  The fact is there just isn’t enough of it and – once institutional and private investors realize that the supply is so disarmingly and alarmingly insignificant – prices are likely to go parabolic.

Which Countries Own Gold?

The top 8 countries owning gold are the United States, with 8,133.5 tons, followed in descending order by Germany, Italy, France, China, Switzerland, Japan and the Netherlands. None of these countries formally back their currency with this precious metal so why do they possess such substantial quantities? One can only speculate but it is probably because of their continuing belief that gold is the only ‘real money’ compared to the coloured paper and numeric symbols on computer screens that are the ultimate in ‘make believe’ fiat currency.

How Much Does the IMF Own?

The International Monetary Fund (IMF) owns the third highest quantity of gold with close to 3,000 tons. After selling some 200 tons from its inventory earlier this year, and is making an increasing fuss over its desire to lead in forming a new international ‘reserve currency’ based on its (SDR’s) Special Drawing Rights.

What Quantity do the Various Gold ETFs Supposedly Own?

The most significant non-governmental holders of gold are the relatively new Exchange Traded Funds (ETFs).  These bullion ETFs are sold through stock exchanges and can be bought (and sold) by retail investors through their stock broker like most common stocks. In aggregate, these gold bullion ETF’s ostensibly own more than 1,856 tons of gold, enough to rank them as the sixth largest holders of gold bullion.

To What Extent Are the Various Gold ETFs’ Holdings Backed By Physical Gold?

Unfortunately, the rapid growth of the bullion ETFs raise serious questions concerning exactly how much of their holdings are backed by metal in a vault and how much is just another version of ‘paper gold’.

ETFs Lack Operational Transparency

Complexity and opacity of their organizational structures and operating procedures leave many questions unanswered. Their prospectuses merely add to the fog.  Most ETFs are layered organizations acting as trusts and repositories coupled with unclear practices concerning audits, segregation and allocation of the metals, unknown location of vaults and where the metals are sourced, and no clarity as to what extent the metals are leased or owned outright.

What is the Value of Gold’s Above Ground Inventory?

The total value of all the gold that exists in the world is roughly US $5 trillion at today’s price and, in terms of physical size, represents a cube measuring 66.5 feet.  That’s not that much from either perspective.

What is the Value of the World’s Annual Gold Production?

The world’s annual gold production totals US $73 billion (silver is only US $10.3 billion) at today’s price. Compare that number to the projected United States budgetary deficit for fiscal year 2010 of US $1.6 trillion, the official U.S. accumulated debt of US $13 trillion and unfunded contingent future liabilities and obligations of well over US $100 trillion. One realizes just how infinitesimal annual gold production is. In addition, in spite of a 400% rise in the price of gold over the past ten years, annual production has not been growing.  This has prompted some analysts to conclude that ‘peak gold’ is now a reality, much like the scarcity of new oil supply.

Phantom Gold?

The LME (London Metals Exchange) based in the UK and COMEX (Commodities Exchange) based in New York are the two principal markets for trading gold bullion futures contracts.  Frequently the huge volume of trades which take place in these marketplaces are cited as evidence that there is plenty of metal available to easily satisfy all central bank, industrial and investor demand. But is that really the case? How large is the bullion market compared to production? Annual global gold production amounts to about 2,200 metric tonnes which is about the volume traded daily on the (LME) London Metals Exchange.

Associated bullion bank depository warehouse vaults are seemingly as opaque in their reports as are bullion ETF’s.  Use of a variety of vague terms to describe the status of holdings such as ‘Registered’ and ‘Eligible’ are part of the problem. Central banks are similarly guilty of obfuscation by using terms such as ‘Bullion Reserve’, ‘Custodial Bullion Reserve’ and ‘Deep Storage’ gold. Nor is there any clarity in terms of how much is leased and from where?

Paper Gold

The central point to be derived from an examination of futures trading in gold is that it is principally a paper trading exercise.  It is the ultimate in ‘paper gold’ in that less than one percent of all trades are settled by taking delivery of the metal.  Since most traders are more than prepared to be paid out in cash, the metals exchanges have good reason not to hold an inventory of the metal since it isn’t needed for the settlement of trades.

Token Gold

Unfortunately, most people not directly involved in the business assume that the vast quantities of paper traded on the COMEX and LME is a proxy for the real deal…gold bullion.  Trades are not, and apparently never have been, backed by the physical metal except in relative token fashion.  Some analysts may consider this reality an attempt at deception.  This writer takes no position on the issue, except to state unequivocally, that the metals exchanges and their associated bullion banks and industry trade groups such as the LMBA (London Bullion Market Association) do not possess any meaningful inventory of gold bullion.

Where’s the Gold!?

Where’s the Gold? Clearly, there isn’t much of it. This is the central question for all of us who consider ourselves investors in precious metals, whether it be the bullion or mining company shares. All of us need to ponder this question if for no other reason than to reflect on the prospects for future capital appreciation.

Parabolic Gold

This writer contends that, given the relative scarcity of gold and silver bullion supply, prices will go parabolic once governments and institutional and private investors realize supply is disarmingly insignificant.

Also refer to my previous article on the future parabolic rise in the price of gold as posted on munKNEE.com at: http://www.munknee.com/2010/06/gold-going-to-parabolic-top-of-10000-by-2012-%e2%80%93-for-good-reasons/

Arnold Bock is a frequent contributor to both www.FinancialArticleSummariesToday.com and www.munKNEE.com. He can be reached by sending an email to editor@munknee.com

From UBS on Friday:  “Physical demand picked up Friday in the wake of gold’s test below $1200, with our sales to India the largest recorded since early January.”

Tulving and Company – one of the largest coin dealers in the country – announced on its website that it had its busiest day ever last Thursday. We bought more gold for our fund this morning after the Comex opening paper raid. I was put on hold twice. Tulving is more sold out of 1 oz. gold bullion products than I can ever recall seeing. Here is what happens now when the big banks drop paper bombs on the Comex:

I’m not sure how anyone can look at this chart and not understand or believe that the Government, via the big bullion banks (JPM, HSBC, Scotia, Goldman etc) manipulates the precious metals market.  I could show examples of many charts that look just like this from the past 9 years:

Anonymous said…B*stards in for another hit. Something strange here, last week was options expiry..is something happening in the near future that we don’t know about? Gensler and his staff should be crucified…slowly, leastways some legal action…same with JPM, HSBC, etc Or is this a set up to drag out all the naked shorts, and then stand for delivery? – break the b*stards – maybe?

Hopium said…
I would say the Fed is scared Shit-less to be honest. http://www.zerohedge.com/article/second-gold-price-intervention-hour
The obvious manipulation as come to the fore front. No I am not a Gold bug claiming manipulation it is BLATANTLY OBVIOUS. But as Dave notes use it to your advantage

Joe said…Just saw Gartman on CNBC saying Gold is on the verge of a parabolic move up. It appears CNBC is starting to leak some truth.

What I will add is that the the path of least resistance right now is “up.”  The physical demand for gold/silver – and the demand for delivery – is starting to take its toll on the attempt by the Fed/Treasury to hold down the price.

Source: http://truthingold.blogspot.com/

Every day last week silver (and gold) traded up in the physical buying markets of Asia and India, only to undergo massive paper selling in London and on the Comex. What was incredibly bullish was the way silver recovered from repeated paper price attacks during the paper-only Comex trading sessions every day last week. I can’t recall seeing price “snap-back” action like this in nearly nine years of trading silver. Silver closed the week slightly lower than a week ago, but closed nearly a dollar above it’s intra-day trading low last week. This is an even more remarkable feat considering that the Dow and the SPX were demolished for the week.

The trading action I observed and participated in, combined with the amount of silver leaving the Comex, tells me that the paper shorts are having a hard time triggering any meaningful stop-loss selling, which is how the big Comex shorts (JPM, HSBC) have historically covered their short positions.  Here is Ted Butler’s comments from his weekly King News World radio interview:

There’s not a lot of people out there looking to dump physical metal right now…and I can see situation developing where a lot people wake up and say they want to acquire big physical positions and that mismatch of no big physical supply and potential physical demand is what the doctor ordered for a big price explosion.

Here’s the link to the entire interview – it’s about 10 minutes and worth hearing:  Ted Butler on silver

I can’t really add much to my commentary above, but they say (whoever the hell “they” is – who is John Galt?) a picture says a 1000 words:

The rush for money debasement around the world has escaped nobody’s attention, and as a result the one undilutable commodity (unless everyone demands physical delivery at the same time) gold has seen investors around the world scramble to get their hands on the commodity, either in physical form or via ETFs. The World Gold Council has released its Q1 2010 update, according to which “Investors bought 5.6 net tonnes of gold via exchange traded funds (ETFs) in Q1 2010.” This has brought the total amount of gold in monitored ETFs hit a new record of 1,768 tonnes ($63.4 billion worth of the shiny metal). Some more on the unquenchable demand for gold: “GFMS reports that the over-the-counter market saw a moderate increase in net demand during the first quarter. Meanwhile, previously existing long positions have generally continued to be very firmly held. Net long positions on gold futures contracts, a proxy for the more speculative investment, fell from the highs experienced in Q4 2009, but they remain high by historical standards.” Despite the persistently high price of gold, and despite the strength of the dollar over the past quarter, demand for gold is not going away.

More details on the Investment Trends as repoted by the WGC:

Exchange traded funds

Investors bought 5.6 net tonnes of gold via exchange traded funds (ETFs) in Q1 2010, bringing the total amount of gold in the ETFs that we monitor to a new record of 1,768 tonnes, worth US$63.4 billion at the quarter-end gold price. ZKB Gold ETF and Julius Baer Physical Gold ETF, both listed on the Swiss Exchange (SWX), recorded the strongest inflows during the first quarter, adding 10.2 and 8.1 tonnes respectively, as interest in the Swiss-based securities continued. These funds remain small, however, compared to SPDR® Gold Shares, or GLD as it is known, listed on the NYSE Arca and cross-listed in Mexico, Singapore, Tokyo and Hong Kong with 1,130 tonnes (worth US$40.5 billion) in assets. GBS Bullion Securities (listed on the London Stock  exchange) shed 7.8 tonnes in Q1, the largest net outflow of the ETFs we monitor.

GLD options

Trading in GLD options fell in the first quarter of 2010 to a total of 11.5 million contracts from 13.7 million in Q4 2009, but remained high relative to the historical average of 7.5 million contracts (from Q3 2008 to Q1 2010). Volumes sharply decreased from an average high of 283,072 contracts per day in December 2009 to a daily average of 143,168 contracts by March 2010. After retreating for most of January, call and put volumes spiked again on 5 February at 215,324 and 132,922 contracts respectively, the same day the yellow metal fell by more than 4.0% and reached the quarter’s low of US$1,058.00/oz, on the London PM fix. Subsequently, option volumes started to fall coinciding with the downward trend in gold volatility. At-the-money implied volatilities on the 3-month call and put options trended downwards during the quarter; implied volatility reached the high for the quarter on 4 February trading at 25.7%, finally retrenching back to 17.4% by the end of the quarter.

Gold futures

COMEX total non-commercial and non-reportable net long positions, a proxy for the more speculative end of investment demand, gradually fell over the quarter. The net long ultimately shed 7.1 million ounces to 20.8 million ounces by the end of Q1 2010, compared to the end of Q4 2009. On average, net long positions in the first quarter of 2010 decreased by 13.8% from  29.2 million ounces in Q4 2009. The net long fell for most of January and February, to later spike up back to 25.2 million ounces in March, as the trade-weighted dollar lost some ground from its peak in late February. This peak was short-lived, as the trade-weighted dollar gained momentum again (primarily on the back of continuing concerns surrounding fiscal and credit woes in Europe) and the net long position in gold fell back again. Overall, both long-only and short-only positions decreased over the quarter. Long-only positions fell by 13.7% on average during Q1 2010 relative to the previous quarter, more than offsetting a 3.0% reduction in short-only contracts during the same period. Whilst net long positions decreased on average during Q1 2010, the price of gold remained well supported throughout the quarter, as physical demand fl ows for gold appeared not to be driven by speculative trading. Nevertheless, net long positions on gold remain high by historical standards, as these kinds of investors also continue to see value in the gold trade.

Over-the-counter market

According to research carried out by GFMS on behalf of the World Gold Council, investor activity in the over-the-counter (OTC) market saw a moderate increase in long positions during the first quarter. Anecdotal evidence and preliminary analysis by GFMS suggest that this moderate increase reflects slower than expected commitment to gold from so-called ‘real money’ funds, partly on the back of dynamics between the gold market and global economic developments including the sovereign debt crisis in Europe. Meanwhile, GFMS believes previously existing long positions have generally continued to be very firmly held, with very  little in the way of liquidations in recent months. Moreover, gold’s strong performance in 2009 coupled with other considerations such as its portfolio diversification and inflation hedge characteristics were likely behind the fresh wave of allocations that  occurred at the beginning of 2010. Finally, GFMS finds evidence that most of the OTC activity has been on the form of “plain vanilla” rather than structured products, in particular in the form of allocated gold positions.

Bars and coins

The latest available data on coin and bar sales corresponds to Q4 2009 (comprehensive Q1 2010 data will be released in mid-May). Net retail demand for gold, which includes demand for coins, small bars, medals and imitation coins and other retail  investment, remained strong during the fourth quarter. It rose by 14.0 tonnes to 187.9 tonnes in Q4 2009, an increase of 8.0% on the previous quarter. This largely reflected a recovery in investment demand primarily in the US— which experienced the single biggest infl ow during the quarter from 19.0 tonnes in Q3 to 37.3 tonnes in Q4 2009—followed closely by India, which increased by 15.6 tonnes. Overall, European investment fl ows also enjoyed solid gains during Q4 2009 adding 7.2 tonnes. Whilst bar and coin demand in Q4 2009 was not as strong for China relative to Q3, anecdotal evidence suggests that Q1 2010 experienced strong demand for physical bars which kept suppliers (including importers to SGE) fabricating gold bars till the last day before the Chinese New Year holiday (14 February 2010)—a peak season for both gold bars and jewellery demand. In the US, first quarter data on American Eagle bullion coin sales from the US Mint shows a more modest picture relative to a very strong Q4 2009. Demand for 1-ounce coins in Q1 2010 was 271,000 ounces (8.4 tonnes), compared to 362,000 ounces (11.2 tonnes) in Q4 2009. Overall demand, however, remains high by historical standards. Investors wishing to purchase gold coins or small bars can find a list of retail dealers on our website at: http://www.invest.gold.org/sites/en/where_to_invest/directory.

Lease rates

The implied gold lease rate is the difference between the dollar interest rate and the equivalent duration gold forward rate—the rate at which gold holders are willing to lend gold in exchange for dollars (also known as the swap rate). Of the two components, the 3-month US Libor started to rise to 0.30% by the end of the quarter from around 0.25% in early January. The second component, the 3-month gold swap rate, fell to a low of 0.16% by the end of January from 0.39% in end-December 2009, before rising modestly back to 0.22% by the end of the quarter. Consequently, the implied gold lease rate turned slightly positive in Q1 after being negative for most of Q4 2009.

One way to measure the potential investment upside of silver is to measure it against gold.  Right now the gold/silver ratio is around 63.5.  In the last couple years years it’s been in the 80′s and as low as 48.  At the peak of the last precious metals bull market in 1980, the ratio touched down around 17.  I fully expect that the gold/silver ratio will once again go at least as low as 16, which is a long term historical norm (i.e. 100′s of years).  In Rome before The Fall, gold and silver were exchangeable at a ratio of 8.

Why is this you might ask?  Silver is poor man’s gold, making it the 2nd best ultimate form of currency.  When gold is over $2000/oz, it will be unaffordable for most people to buy much gold to protect themselves.  But at that point if the gold/silver ratio is still around 60, the price of silver will be a much more affordable $33/oz.  I suspect that the ratio will be a lot lower by then. Furthermore, because the relative price of silver is much lower than gold, it is more “fungible,” meaning it’s more practical as a currency for everyday mundane use.

The chart below – inspired by DC from NJ – is another way of measuring the relative strength of silver vs. gold.  As you can see, silver  has been in a steady climb in price relative to gold and is currently chewing thru a lot of “resistance,” as defined by the two horizontal black lines.  Hedge funds currently like to “game” the gold/silver ratio, which may slow down the ultimate price movement of silver against gold.  However, given that the total market value of all the available silver in the world is small compared to gold, when the “poor man’s gold” effect really takes hold, expect the price of silver to really rocket higher.  Eventually that ratio will decline to a level that is much more consistent with the ratio that held for centuries.