‘Remember, remember the fifth of November.’
Earlier this week, November 5th, was Guy Fawkes Day in England, which commemorates when Guy Fawkes (who else?) tried to blow up Parliament in 1605. More on that in a moment, because right now that’s the least of our worries!
Today we have larger fish to fry….
There’s a stunning development in the world of gold buying and selling. In fact, there’s a massive gold shortage across conventional markets. This shortage may be a precursor for a price melt-up. Let’s look at some charts.
What’s going on? What do these graphs mean?
Above you’ll see ten years’ worth of graphical data concerning gold trades on COMEX, which is an exchange that offers warehouse services for clients who trade metals. That is, COMEX stores gold at designated sites, on behalf of its clients. When you read about ‘gold trading’, this is the gold that gets traded.
Let’s back up for a moment. COMEX holds metal on deposit to settle futures contracts, to back-up buy/sell deals and to secure transfers between parties. On occasion, gold gets withdrawn from COMEX warehouses. (Too many occasions in recent months, as we’ll see below.)
As part of its ‘exchange’ service, COMEX issues daily reports that detail its stock of gold, silver, copper, platinum, palladium and more. That is, COMEX states exactly how much metal is stored in its warehouses, and how much metal is available for trades.
In general, the idea behind daily COMEX reports is for traders to know how much metal is there to support futures contracts. The data also give insight into what large gold (and other metal) owners are doing in terms of trades and settlements, as well as how much metal is being drawn out for delivery. So far, so good.
Take a look at the top graph where it shows the price of gold (in yellow) and the ‘open interest’ in gold contracts (in dark blue) from 2003 to the present. This reflects more and more players getting into gold futures during a decade-long price rise.
The open interest designation reflects the number of option and/or future contracts that are not closed out – thus remaining ‘open’. Note a general rise in open interest between 2003 and 2012, and the decline over the past year. Makes sense, right?
Now look at the second graph. It shows how much gold is represented by the open interest. That is, how much gold it would take to satisfy all of the contracts out there, if people actually demanded delivery.
Back in 2011, the number was north of 60 million ounces, or about 1,700 tonnes (metric tons). Today, it’s just less than 39 million ounces, or about 1,100 tonnes. One way or the other, it’s a lot of gold, to be sure.
Then again, most traders just deal in ‘paper gold’ and not the real thing. Most people trade gold for the dollar-side of the deal, not because they want to take delivery and hoard gold in their vaults, let alone bury it in a treasure chest in the back yard. Still, the graph illustrates how much gold is in play just via COMEX.
Big Physical Gold Shortage Developing
Now look at the bottom two graphs. Note the second to last graph. It reflects an abrupt drop in ‘registered’ gold stocks over the past six months. That’s gold eligible for COMEX delivery. The chart distinctly shows quantities shrinking fast, to about 660,000 ounces – which is the point of drying up, certainly as compared with average levels over the past ten years or so.
Finally, take a look at that bottom chart. It reflects the number of ‘gold contract’ investors with a claim on each potential COMEX ounce. Looking back to 2003, COMEX data reflect between 10 and 20 potential ‘owners’ for each ounce, with an excursion up to the 30-range in 2011.
But look what happened in the past few months. The number of ‘owners per ounce’ has spiked up to an unprecedented 55! In other words, if fewer than 2% of COMEX gold contract owners hold their positions to expiration, and then ask for delivery, COMEX warehouses would be cleaned out. The other 98% of gold contract players would be left holding an empty bag.
What does this mean? COMEX numbers clearly show a severe squeeze on physical gold. The gold that backs ‘trades’ is at an all-time low! The registered gold inventory is at critical shortage, unprecedented since the days of $300 gold back in the early 2000s.
Where’s the Gold?
Meanwhile, the well-publicized, ongoing disgorgement from ETF plays, such as SPDR Gold Shares (GLD) is NOT going into warehouse inventories, certainly not at COMEX. In fact, the evidence is that this gold is going to refiners in Europe, and thence to China and other gold-buying locales. The GLD outflow is no longer available to Western investors – not at current prices.
Here’s a trend that is NOT your friend.
The gold is going away, and I strongly suspect that it won’t come back in our lifetimes. National wealth – in the form of gold – that required generations to accumulate is leaving our economy. It’s migrating east.
Should we be worried? Well…it will only take a small change in ‘gold psychology’ for more and more Western investors to figure out what’s happening. The smart ones will demand delivery of physical metal, and the sooner the better. Then we could see a price melt-up for gold unlike anything in modern history.
What should you do? If you own physical gold, smile and hang on. If you don’t own physical gold – or silver, platinum or palladium – get some.
If you own mining shares, hang on as well. We’re in a bottom phase of the past year’s share price melt-down. Long term, valuations will rise.
Don’t Be Misled by the Lying Liars of the ‘News’
Meanwhile, watch the news. You’ll see and hear ‘big names’ in politics, economics, monetary policy, the mainstream media and big banks continue to bad-mouth gold. At root, they lie! They are lying liars! Oh, they lie like dirty rugs! These lying honchos are desperate not to let the news of a physical gold shortage become too well-known. They cannot afford – in any sense of the word – for large numbers of investors to understand how bad things are with gold inventories.
This physical COMEX gold shortage could quickly transform into a widespread run on gold. When more and more people figure out how precarious is the situation with physical gold, the metal markets will come afire like Yellowstone Park, burning to the ground back in 1988.
Back to Guy Fawkes
One last point, concerning the 5th of November. Guy Fawkes was one of the central players in the British ‘Gunpowder Plot’ of 1605. Fawkes was an English Catholic who joined a plot to assassinate King James I (of Bible-fame), and then restore a Catholic monarch to the British throne.
Fawkes and his co-conspirators placed barrels of gunpowder beneath the House of Lords, intending to take out much of the British leadership in an explosion. However, someone tipped-off the king’s inner circle, and authorities searched Westminster Palace during the early hours of Nov. 5, 1605.
The constables found Fawkes guarding explosives. Fawkes was arrested, questioned and tortured until he broke and spilled the beans about his plot. Fawkes was sentenced to be hung, dragged behind a horse and cut into four pieces on Jan. 31, 1606 – speedy justice, back then – but jumped from the gallows rather than give his English captors the pleasure of torturing him to death.
Today the name of Fawkes is synonymous with the Gunpowder Plot. In Britain, they commemorate Guy Fawkes Day by burning the man’s image in effigy and setting off spectacular fireworks.
But when COMEX gold runs out, we’ll have bigger things to worry about than plotters wanting to blow up the Houses of Parliament. Beware, beware…
That’s all for now. Thanks for reading.
Contributing Editor, Money Morning