Today Alasdair Macleod warned a major crisis for $37 billion Comex gold shorts may be triggered by a historic panic in the banking sector.
A Potential Crisis In Comex Gold
July 7 (King World News) – Alasdair Macleod: We are all used to the bullion banks covering their shorts on Comex by waiting until the speculators are over-bullish and vulnerable to mark-downs that trigger their stops. Algorithmic traders go from long to short in a heartbeat as well, and they dump contracts into a falling market, speeding up the decline. We should say at this juncture that the Managed Money speculators are short-term, attracted by futures leverage, and their gold position is often part of a wider risk strategy deployed by hedge funds. They do not intend to stand for delivery. The wider investment world taking strategic portfolio decisions does not often get involved with gold, so the Comex gold contract has been a secular play.
The table below shows a typical set-up, in this case July 2016. The Managed Money category (296,106 — net 259,129 contracts) is close to record long. Open interest was 633,000 contracts and the gold price was at $1360, having run up from $1040 the previous December.
Swaps Were Heavily Short Gold In July 2016
In the non-speculative category, the bullion banks (Swaps) had 56% of the shorts and the Producer/Merchants 44%. Mark-to-market value of the Swaps net short position was $25 billion. Of the speculative longs, the managed money category (hedge funds) held 69%, and at 296,106 long contracts it was almost a record. There was a high level of bullishness; easy pickings for the bullion banks, who by the following December drove the price down to $1120, reducing their net shorts to under 50,000 contracts.
It was a game that evolved out of Comex futures being used simply to offset long bullion positions at the LBMA. Over time, bullion bank traders increased their trading position limits, as opposed to their pure hedging activity, making easy money jobbing the other side of Managed Money trades.
Now look at the current situation, with the gold price at decade highs ($1775) and open interest at 561,628 (30 June).
TROUBLE FOR GOLD SHORTS?
Swaps More Heavily Short Gold July 2020
In the non-speculator category, the Swaps are more short than they were in July 2016 despite open interest being 71,372 contracts lower. The mark-to-market value is record net short at $36.6 billion. What has happened is the Producer/Merchants have cut their positions, presumably deciding that hedging mine output is less important in the current inflationary environment. Consequently, the bullion banks are bearing 71% of the short exposure.
The speculator category makes this more interesting still. At 138,555 net long, hedge funds are only 25,000 contracts longer than average, and compared with their bullishness in July 2016 have hardly got going. It is the other categories, Other Reported and Non-reported have taken 56% of the long side, and they are not behaving like skittish hedge funds at all. These include family offices, the ultra-wealthy and foreigners through Globex who are standing for delivery as a means of getting their hands on physical bullion —171 tonnes from the June contract alone.
Conclusion
Bullion banks are between a rock and a hard place. For years they’ve been playing the hedge funds as an angler hooks and plays a fish. That game has ceased and there is no easy way for them to get level. For the moment they are trying to put a lid on the price, but the cost has been rising open interest, and therefore rising mark-to-market positions.
The August active contract runs off the board at the end of this month and bullion banks are likely to be forced into large delivery volumes again. Furthermore, the exchange for delivery arbitrage facility between Comex and the LBMA is broken, allowing Comex premiums to London spot to go unchallenged.
It is increasingly possible the gold contract is evolving into deep crisis, and that force majeure might have to be declared if, as seems increasingly inevitable, a wider banking crisis ensues.
Also of importance…
Capitalizing On The Gold & Silver Bull
Eric King: “Ivan, as you know I purchased over 7 figures of your company’s stock because I believe in you and I believe in your team and the amazing projects you have been able to acquire ahead of the major bull run in gold, silver and copper. How well positioned is Auryn to take advantage of this bull market?”
Ivan Bebek: “Eric, we have raised and spent over $100 million in the past 4 years. And for clarity, the money was not spent waiting for the bull market to start, it was spent preparing for this bull market. We have acquired some of the largest scale Gold, Silver, and Copper discovery opportunities in the world. Auryn now has three major tier-one scale projects in its portfolio, and we anticipate aggressively drilling them over the next 12 months. So we have remarkable blue sky for investors.”
Eric King: “Ivan, you’ve been very public about your intention to spinoff Auryn into 3 companies, each representing major opportunities in all key bull market metals — Gold, Silver, and Copper.”
Auryn May Split Into 3 Monster Gold, Silver & Copper Swings
Ivan Bebek: “I have been very public with the idea that we may split our company or spin it into three shares for investors, one for each commodity of focus – a benchmark for this decision timing has been market conditions, specifically metal prices. We also believe we now have the people in place to run the new companies and our objective is to achieve this within the next few months.”
Eric King: “What will drive value in Auryn over the next 6-12 months for shareholders?”
Large Scale High-Quality Targets
Ivan Bebek: “Outside of the split into 3 companies, there will be lots of news in both Canada and Peru. As of June 22nd, we resumed exploration in Peru under new Covid guidelines, and we expect more large scale high-quality targets to be added to the already existing drill plans. And in Canada at our Committee Bay project, after a recent a targeting breakthrough, we will soon see how it applies across the entire 300km long gold belt.
The bottom line, Eric, is this will be an incredible 12 months for Auryn Shareholders as we start to capitalize and unlock value on the major opportunities we have created for our shareholders.” Auryn Resources, symbol AUG in Canada and on the New York Stock Exchange.
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