The Gold thread

Just read through the thread. Looks like pippendagimp has it all covered already. I should visit D&D more often before starting threads.

Regarding an issue raised by Major, why US inflation is so low, while global inflation is high:

It has nothing to do with demand.

The reason behind this phenomena is the brilliant scheme the US pulled on the rest of the world after WWII. After Europe depleted its entire gold reserves in exchange to the US for funding the war, their currencies and nations were insolvent and needed backing. Holding all of Europe's gold, the US backed these currencies with the $dollar, which was in turn backed by gold, creating the first global currency and the reserve currency of the world. While the rest is no longer the case today, its status of the latter remains, and it is needed for the settlement of all commodities.

For this reason, a vast sum of US dollars are held by foreign nations. The goods and commodities that we purchase from around the world are paid for in $dollars, which are then funneled to these foreign nations, held in their reserves, and used to purchase essential commodities like oil.

Now let's talk about inflation. The definition of inflation is an increase of the money supply. Price increase is merely a symptom of inflation. It is undeniable that there has been an untethered ballooning of the money supply since QE has begun. The question is, where has this money gone?

The answer is the same place it has always gone, all over the world. This is why the US has not experienced dramatic inflation, because the money supply within these borders has not increased as dramatically by comparison. Meanwhile, it has "exported" its inflation, allowing the rest of the world to shoulder our burden and mistakes.

Like I said, it is a brilliant scheme.

Problem is, there is a breaking point. The turmoil you see in the rest of the world are not political events, they are economical. There is a threshold for a nation's poor where the risk/reward of revolt outpaces standing idly by. This threshold by historic measures is around: food prices > 40% of income.

The Arab spring, and what you see today in Egypt, are all brought about by, in essence, QE in the US. Of course there are social issues behind them as well, but the breaking point between complaint and action intersects when it becomes too hard to put food on the table.

A similar situation is playing out in China. Rampant inflation is what has cause its property bubble/craze and insatiable appetite for gold. For China however this is on a much grander scale since they hold mass amounts of our $dollars/debt.

Again, China nor the middle east is currently experiencing an economic boom. In fact they are slowing. That is not the cause of their inflation, but rather the massive inflex of US dollars since QE.

The tipping point for massive US inflation will be any instability in China. The Communist Party of China will not risk national security caused by social unrest due to inflation. The first signs of this and they will unpeg the Yuan while dumping their $dollars to control domestic prices. That will be the proverbial chicken coming home to roost for the US, as the sheer amount of $dollars spewing back into our borders would cause Weimaresque hyperinflation.

China has already begun to diversify away from the dollar in recent years through its hoarding of commodities, and recent consumption of gold. Meanwhile, 80% of the debt issued by the US treasury today is bought by our very own Fed. The writing is on the wall.

Maybe events will not unfold like I've described. It is only a worst case scenario. Maybe someone will come up with a better solution when the time comes. No matter the outcome, the reasons behind the lack of inflation here, and rampant inflation abroad are such. And the reasons are not benign as some suggest. No matter how brilliant the scheme, they never last forever.

 

80% of QE is hoarded by banks since they are being paid risk free interest by the Fed(taxpayers). True. The rest of it flows freely to the rest of the world as long as the US maintains a trade deficit.

I am curious to see what will happen to these excess reserves once foreign buyers diversify away from US debt, as they already have, and interest rates continue to rise. Like I said, the vast majority of our national debt is purchased by ourselves nowadays. That is what is referred to as a bubble. Where will interest rates end up?

More importantly, will the Fed increase the interest it pays to these banks to keep pace, in order to keep the excess reserves from flowing into the money supply?

How high are they willing to go before there is public outcry? Remember, this is risk free interest taken out of the pockets of taxpayers and handed on a silver platter to bankers by the Fed.

 

Wondering if Mr. Brightside(or anyone else) could chime in on a few things, since I know you are a gold trader.

What are your thoughts/what are you hearing about the current highly irregular environment in the gold markets:

1. Gold futures in backwardation since February.

2. Negative GOFO rates since July 8, which is 33 consecutive trading days now. To the best of my knowledge, GOFO rates have NEVER been negative for more than 2-3 days at a time.

Implications of a negative GOFO rate(rate at which gold is leased) is that market participants are willing to pay you to borrow your physical gold today.

Backwardation in the gold market is also highly irregular, since in theory one could arbitrage this phenomena risk free. Simply selling physical gold at spot for cash, and using your proceeds to purchase cheaper futures contracts(since they are backwardated). By taking delivery on these contracts in a few months, you just increased your gold holdings. This is why backwardation is a rare event in the gold market, and extremely brief when the conditions do exist, quickly being arb'ed away.

However, that is not the case currently. Gold futures have been stuck in backwardation for the longest I have ever seen. The implications are that participants are unwilling to wait the few months for delivery, electing to hang on to physical.

This all comes on the heels of huge draw downs of Comex inventories, JPM inventories, and GLD inventories.

In turn, those drawdowns coming on the heels of the scandal with Bundesbank repatriating their gold from the NY Fed, and the Fed in essence telling them to GTFO. Settling on a 7 year plan to ship 3 cargo planes worth of gold back to Germany. Because apparently 7 years is how long it takes to pack 3 cargo planes.

It seems to me that these events are signalling clear stress on the physical market. The Fed's response to the Bundesbank seems to have triggered a run on the Comex exchange, with participants taking delivery in droves, fearing that there will be none to deliver in the future(as Germany found out with the Fed).

With Comex reserves depleting at a record pace, the likelihood of default seems to be more and more of a distinct possibility.

Rumors of such have been widespread in recent years. Personally I have never been a believer. Premiums on physical gold currently are at normal levels, nowhere near elevated enough if a Comex default really was imminent.

Still, these irregularities in the market condition are curious, especially the persistent negative GOFO which I have never before seen. If not a Comex default, then what? Something seems to be going on.

 

We've already seen a precedent to this with the recent ABN Amro default on its gold accounts resorting to cash settlement instead. This, coupled with the NY Fed default on German gold(because default is exactly what it was) is precisely what is leading to the curious conditions in the physical markets that I was alluding to.

It is a game of musical chairs, and so far, the only person sitting pretty seems to be Chavez.

As for a run to $1,000, or $800 like some suspect, I have a few issues with this. Some, if not most of this is conjecture, so bear with me.

The liquidation in gold that started in January came mere days after the NY Fed defaulted on Germany's gold. The question is, why in the world did the price of gold collapse on the heels of this? Shouldn't it rise or even skyrocket if physical gold that supposedly exists.. doesn't?

To find the answers to those questions, you have to realize where is the Fed's gold, if not in it's vaults. It is leased out to the JP Morgans, HSBCs and other bullion banks, who have long ago sold this gold onto the market, using its proceeds to invest in higher yielding debts and derivatives. That is the purpose of a bullion bank. No one, not these banks nor the Fed, anticipated that they would one day actually need this gold again, which has since been loaned out, leased out, nakedly short, and long gone.

That is, until Germany's request. That is when the proverbial music stopped. And the scrambling began.

I believe this prompted the Fed to call in the gold that it leased out to the banks. And in turn, this means the banks have to buy back the gold that it nakedly sold, perhaps years ago and hundreds of dollars lower. To achieve this at minimal cost, and to mitigate the paper losses that these banks never thought they had to take, a liquidation of paper gold was needed to buy back physical at much cheaper prices. This coincides, and explains the massive draw downs in Comex inventories.

So far, nothing is out of the ordinary. The gold and precious metals markets have been rigged and manipulated for years if not decades through the fractional paper gold scheme, so suspecting Jamie Dimon for pulling a little stunt like this is not out of the realm of possibility.

What IS out of the ordinary, and what these culprits did not expect, is the massive physical demand out of China that this triggered. 1,000 tonnes were imported through Hong Kong last quarter, where premiums hit $100 on physical delivery on the Shanghai gold exchange. I believe this is what is causing the extra-ordinary conditions in the gold market today- backwardation/negative GOFO.

Connecting the dots. Germany asks the Fed for its gold back -> Fed asks bullion banks for its gold back -> bullion banks crash the paper gold market to buy back physical cheaply -> cheap gold causes massive Chinese demand, who have zero interest in the GLDs or GCZ13s or any other paper trash, they only want gold Pandas and bling bling, the real deal -> Chinese demand cause stress on the physical markets, because there simply isn't that much physical out there -> backwardation -> negative GOFO

With this scenario in mind, my point is: regardless of where the $USD goes in the near term future, the market- or Comex specifically- simply cannot withstand the physical demand out of China if paper gold were to hit $800 or even $1,000. It would default. Heck, there is risk that it defaults even now, without those conditions.

Again, much of what I am spewing is conjecture, or deductive reasoning as I would call it. Who knows what is really causing these things and what is to come. BUT, what is not conjecture is the current irregularities re: backwardation and the GOFO, both pointing to stress on the physical market, for WHATEVER reason.

 

You have a fundamental misunderstanding of gold if you are trying to value it.

Gold is gold. You use gold to value all other things -since it is money- not the other way around.

When you see gold rise in $dollar terms over time, it is not appreciating. Its value is not increasing. Remember, gold is a preserver of value, NOT a creator of value.

Instead, what the rising gold in $dollar terms tells you is that your $dollar is becoming less valuable.

 

True, a minor detail. Hopefully Merkel is investing in higher quality food testers.

Like the link mentions, India doesn't even have that gold. It never left London ever since they purchased it in 2009, which probably means it is somewhere in the NY Fed basement, which probably means it is sitting pretty somewhere in Beijing or Moscow today.

But I do agree, a default would be unthinkable. I am not even sure how it would work, with the current pricing mechanism completely thrown out the window, not a single physical holder would sell, at least initially. How do you value that which is not for sale? Definition of priceless I suppose. A question only robbie can answer for us.

As a trader by profession, I can fully attest to the irrationality of markets in the short term. However, we also have to remember which markets we are talking about- gold being one of the most manipulated. The large players in this market transcend chart patterns and normal market behavior.

With that in mind, to continuing our logic, if it is true that there is massive physical demand below $1,200 as China has shown, and this demand cannot be currently satisfied by physical supply, straining the tenuous tether holding the whole ponzi scheme together... if I am one of the culprits with skin in the game, with vested interest for the current paper scheme to continue, there is no way that I would allow gold to go back down to $1,200 or below and risk a Comex default.

It is painfully clear that the Chinese and Indians(with onset of hyperinflation) are not speculators like the Paulsons and Soros of the world with the trader's mentality of buying a breakout and selling a breakdown. By contrast, the Chinese and Indians are not looking at gold from the perspective of a Return on Investment, but rather a Preservation of Wealth. Which as we have discussed here, is the true value of gold. With that mindset, their purchases will only increase as the price of gold declines.

Knowing this, and pretending again that I am one of the major players/manipulators with vested interest in the current system, the only logical course of action would be to prop UP the price of gold, in hopes that it would deter physical demand. Remember, rising gold prices attracts investment demand in paper, which is welcomed. GLD, one of the largest culprits of paper gold is set up by the bullion banks themselves. On the other hand, as we unwittingly just discovered recently, declining gold prices attracts real demand in physical, which is a big no no, because we have none.

Which as it turns out, may be exactly what is happening now:

http://goldsilverworlds.com/price/jpmorgan-now-long-gold-a-game-changer/

http://www.zerohedge.com/news/2013-08-16/jpm-advises-buy-gold

You have to hand it to them. With the engineered breakdown of gold in April, so obvious to chartists and technical analysts with that breached triple bottom begging to be sold into, Comex short interest reached an ALL TIME HIGH. Meanwhile, the same guys who engineered the breakdown to begin with are now long, and will be squeezing the historic amount of shorts that have been sucked in, likely for a hefty profit on the way up. All while covering their own asses and protecting the solvency of the Comex and their paper scheme.

Just another day at the office for Mr. Dimon.