A remarkable vault run is continuing as Comex gold inventory has plunged an astonishing 30%.
July 3 (King World News) – Alasdair Macleod: Trading conditions on Comex suggest that gold and silver bears are about to be squeezed — potentially viciously. If so, then prices measured in fiat currencies have bottomed.
Let’s start with gold. This week, the price has rallied from a low of $4050 on 30th June to $4170 this morning. As is the case in silver the July contract and option series on Comex expired this week, an event which usually leads to a sell-off. That pressure on prices has ended.
As the chart above illustrates, it leaves open interest in the gold contract the lowest it has been since the run-up to the December 2015 low of $1050. This tells us that speculators who sell dollars to buy paper gold are even more absent as they were then, which was the springboard for a decade long $4500 dollar rise. In other words, they will buy gold futures, adding potentially 300,000—400,000 contracts to take it back into oversold territory.
This is the outlook that the bears, typically market-makers and bullion banks must now fear.
Indeed, market sentiment is similarly bearish to the 2015—2016 period. But this time there is a difference. Normally, bullion banks will run a long paper position in London to counterbalance a short position on Comex, with the exchange-for-physical facility acting as an arbitrage between the two. Being an over-the-counter market, London is opaque and we don’t know what the net position really is. But we know the swaps on Comex are net short about 200,000 contracts, which is about 622 tonnes and stands for delivery are an increasing feature, over 150 tonnes in June alone. The warehouse levels are declining:
KING WORLD NEWS NOTE: Vault Run Continues As COMEX Gold Inventory Has Plunged An Astonishing 30% In Less Than 9 Months!
The problem for bullion banks is that markets are evolving from paper dealing into physical settlement. They will be acutely aware that China is not only accumulating bullion, but they are aggressively developing Hong Kong as a major bullion-based trading centre, while at the same time Singapore has similar ambitions. It will require banks to hold significant amounts of physical bullion to back contracts in both Hong Kong and also to a lesser extent perhaps Singapore.
Banks don’t like this for a very good reason. They are dealers in credit, not in physical metal. Where they have an obligation, they offset the risk in paper contracts. All the debate about gold’s status in Basel 3 misses this point entirely being wholly irrelevant. It should also be understood that for the last 45-years, any increase in investor and speculator demand for gold and silver has been absorbed by expanding outstanding paper contracts which just like any form of bank credit is issued at will.
What the absence of speculative interest in current markets also tells us is that the paper game is now contracting. As a means of setting spot prices, it is gradually being replaced by China’s physical demand, and in the future China’s sponsored market in Hong Kong. And as paper supply contracts, the process by which gold was suppressed between 1980—2015 is being reversed, leading to a massive squeeze on paper gold.
The same is true for silver contracts. The chart showing the relationship between Comex open interest and the price is next:
The problem for paper traders is that demand for physical silver has to a large extent been satisfied by China, who has until recently been prepared to keep prices low. That suddenly changed late last year, propelling the price from under $50 to over $120 at one point. Paper traders have now lost China’s suppression, exposing paper contracts in silver to a squeeze of historic proportions.
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