Random Thoughts About A Random Market
We are now in wait-and-see mode as the markets hold their collective breaths with respect to the next twist in the credit crisis (not to mention the bailout package that is supposed to soothe it). After a day of yanking and pushing, gold pretty much ended where it started even while the dollar has continued to rally. I suppose this is an accomplishment of sorts but there are some disappointing aspects to this behavior. Specifically, the world as we know it is apparently teetering on the edge of collapse — at least in the opinion of some know-it-alls — at the same time that COMEX gold is finally seeing some short covering and investment demand for gold bullion remains very strong. Yet gold prices are essentially range bound. Meanwhile, silver has shaken off some of its drubbing from yesterday but the white wonder metal is still trading about 50 cents below day-ago levels.
We know there is plenty of gold and silver buying out there, but who (in their right mind) is still selling silver and gold? There are only three possibilities as I see it. One, liquidity-strapped investors need to raise cash to pay fiat-denominated obligations as they come due. Two, traders are selling long positions (and even shorting) gold and silver on the expectation that deflation (or at least that commodity prices will continue to collapse) is around the corner and it will take gold and silver down. Three, there is a conspiracy to suppress gold and silver prices. The thing is, it doesn’t really matter which of these is actually at “fault”‘; all that matters is that gold and silver are range bound and frozen just like the stock markets. Ultimately, that probably means the gold and silver markets as a whole are just as confused as everybody else.
Interestingly, this confusion is being manifested in the gold and silver basis. The big wealthy insiders behind the scenes whose “secret” buying of gold and silver would be tipped off by close observation of the basis are just as unsure about what happens next as the guy on the street. If the bigwigs were certain that monetary collapse were imminent and unavoidable, I am 100% certain that the basis would “tell all”. Yet not a lot of telling is happening right now. It doesn’t help that the LBMA has not reported gold and silver forward rates for more than a week after announcing that “lease” rates would no longer be provided because the LBMA was no longer reporting LIBOR (you will recall that the “lease” rate equals LIBOR minus the forward rate). Some suspect there is a conspiracy behind this but my thought is that the LBMA is unable to get a reliable and timely source for LIBOR. Be that as it may, there is absolutely no reason why the LBMA should stop reported gold and silver forward rates and I have asked them to clarify the situation. It would be major blow against market transparency if the LBMA were to stop reporting the forward rates. I’ll let you know what I find out.
As it is, the basis has been providing some important trading clues starting around the middle of September. As I noted on September 16, the LBMA forward gold rate dropped by a significant amount that day after declining for several days prior. None of us on the outside knew then that AIG would be getting the axe later that day, but clearly some insiders did know something significant was about to happen. I certainly hope that my cloaked mentioning of this wasn’t the reason the LBMA stopped publishing this very important data. In any case, as registrants of GSUL 5 in Canberra have already discovered (by having access to my password-protected posts on the basis), there were other telltale signs that bigwig insiders not only knew that a major shock would be coming but also that it would be friendly to silver and gold.
Speaking of which, I will be updating the basis post later today or tomorrow but once again the password is only available to those who are BOTH Founding Members of The Metal Augmentor and who have also registered for the GSUL 5 session. Look, I know this may seem like silly cloak and dagger stuff, but I also want to provide a strong incentive to get as many people as possible to come see the Professor in what may be his last live seminar. Even if you can’t physically travel to Australia, I believe it is worthwhile to sign up as I plan to stream the seminar over the Internet each day and take questions during the session by e-mail. In addition, by signing up for the seminar, you will have access to all the password-protected posts. And if you’re looking for at least a small hint before making a decision, I will be giving a sneak peek to all Founding Members in the next few days, so at least consider signing up for The Metal Augmentor.
Getting back to COMEX gold, I would like to point out that delivery notices on the expiring October contract have been somewhat light so far, running about half the 2007 rate. This is not at all what we should expect under the circumstances and it might be worthwhile at this point to reconsider the recent rumors that have been flying around (at Le Metropole Cafe, etal) concerning COMEX traders being advised against taking delivery on October gold futures. Truth be told, the lower delivery volume compared to last year is somewhat consistent with the decline in registered COMEX warehouse stocks between 2007 and 2008 (from approx. 3.8 million ounces to approx. 3.2 million). At the same time, however, the eligible category has grown by almost 2 million ounces. So it’s not like there is insufficient gold in the COMEX warehouses, given the right price, to meet a heavy delivery schedule. Indeed, the central issue is probably that the price is not right, or more specifically, the current gold price is not high enough to provide an incentive to sell gold held in COMEX warehouses.
For those who aren’t familiar with the terminology, the registered category of COMEX warehouse bullion stocks generally refers to gold and silver bars against which COMEX warehouse receipts are outstanding. The COMEX publishes these stocks on a daily basis and they can be found here: Silver | Gold. The registered category is the total pool of gold and silver available at any time to meet delivery requirements under expiring futures contracts or to establish initial futures contract positions through a transaction called exchange-for-physicals (I’ll explain this another time). It is important to realize, however, that many parties holding COMEX gold and silver in registered form have no intention of making their holdings available for delivery. By this I mean that such parties are neither (1) holding a short futures position against the warehouse receipt nor (2) willing to sell their registered metal (warehouse receipts) to a party with a short futures position. Indeed, a substantial portion of those holding registered metal would have acquired the COMEX warehouse receipts by holding long futures positions for delivery. In other words, these registered stocks are held for investment and not for commercial purposes.
In comparison, the eligible category of COMEX warehouse bullion stocks generally refers to bullion held in the warehouses that meets the specifications of an acceptable COMEX bar (proper weight, size, purity and refiner) but does not have a COMEX warehouse receipt issued against it. For example, an investor might purchase several 1,000 oz. bars of silver from a dealer and then deliver the bars for allocated storage at a COMEX warehouse. This is a private arrangement and has nothing to do with the COMEX. Unless these bars are officially registered (the easiest way to do this is through the aforementioned exchange-for-physicals), they will remain in the eligible category until withdrawn from the warehouse by the investor. Thus, the appropriate way to treat eligible COMEX warehouse bullion stocks is that they represent metal that could potentially be registered at some point in the future but cannot presently be used to make delivery under a short futures contract.