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July 19 (King World News) - By Grant Williams

Since the April smackdown in COMEX gold, physical metal has been pouring out of recognized warehouses and stockpiles as investors all over the world rush to perfect ownership of an asset that, when owned, unlevered, outside the banking system provides the ultimate hedge against market dislocations.

It is incredibly rare to see the price of something falling so precipitously at the same time people are queuing around the block to buy it so what is going on?....

Continue reading the Grant Williams piece below...


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“The answer, I suspect, lies in the chart below:

The huge decline in the gold price coincides almost perfectly with the request by the Bundesbank to have 300 tonnes of gold held at the NY Fed returned to Germany - an operation which we are told will take seven years.

For years the Central Banks have been leasing out their gold to bullion banks at essentially zero interest to fund the ultimate establishment-endorsed carry trade but now that trade seems to have run its course and bullion banks are going to have to come up with potentially hundreds of tonnes of gold.

Fortunately for them, the structure of the market and the disconnect between the Gold price (the price quoted for a paper futures contract on the COMEX that is effectively merely a claim on physical metal) and the price of Gold (which is far more important as it represents what a buyer has to pay to actually own an ounce of physical gold free and clear) enables them to shake out enough loose holders of the metal via the ETF to make a dent in their shortfall - but only up to a point.

Almost 30% of the total holdings of gold ETFs has been withdrawn since the beginning of the year and this is incorrectly reported as a very bearish development but it's the ultimate destination of that gold that's interesting.

For every seller of the GLD ETF there is a buyer - both parties transacting in paper - not gold.  The only way to convert shares of GLD shares into physical gold is to buy 100,000 of them (roughly $13 million at current prices) and then present them to any one of the Authorized Participants who will redeem the gold on your behalf and deliver it to you.  Supposedly.  There is plenty of anecdotal evidence that not all redemption requests are being met but that is a story for another day.

Roughly 600 tonnes of gold has been sucked out of the various ETFs since their holdings peaked in Q1 but, due to the mechanics of the ETFs, virtually every ounce of that has to pass through the hands of the bullion banks - the same bullion banks who are in a bind over supplying physical metal to meet redemption/repatriation requests.  It's a perfect mechanism to ensure that control of physical bullion is safely in the hands of the bullion banks.


After the quiet default by ABN Amro in early April, 'smart money' has been adding to the problem facing the bullion banks by withdrawing their physical gold from the COMEX warehouses in droves and moving it to private storage facilities outside the banking system which leaves an even smaller pool of available gold to meet an increasing number of delivery requests.

With the seemingly relentless nature of the selldown in gold since April, we haven't had an opportunity to see what the resultant changes in the underlying structure of the gold market look like in light of an increasing gold price.

As soon as we get an 'event' which demands people own gold in a hurry (think; Cyprus-style bail-in, overt declaration that the Taper is off the table, more QE etc.) the massive outflows in physical gold over the last few months will become apparent and, as hard as gold has fallen, it has fallen predicated purely on an oversupply of paper.  A rise driven by a shortage of the physical metal itself will be far more spectacular.”

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