When it becomes widely known that all of the people who think they own gold in fact don’t own gold, that it’s been hypothecated and re-hypothecated so many times that there are 100 claims for every single ounce of physical gold, that is when the prices of gold and silver will really go berserk to the upside, and at that point the shorts will have serious problems - John Embry on King World NewsThe press pounced all over the massive smack down on gold/silver last week. Headlines were thrust in everyone's face. Gold dropped $200 dollars in two days and the media wanted to make sure everyone knew about it. Well, guess what? As I write this, gold has gained back over $100 that drop. But is this being broadcast in flashing marquee lights the way the sell-off was? Of course not.
In the aftermath of that sell down, a lot of facts have come to light. But first, the bounce we're seeing is illustrative of the fact that you need to hold on tight in this sector in order to truly benefit from the wealth benefits of investing in physical gold/silver and good mining stocks. As an example, since late 1999, the mining stocks have suffered two periods in which the mining stocks had severe sell-offs of this magnitude - late 1999 to early 2001 and mid-2008 - Oct 2008 - in response to large manipulated drops in the metals. But after the sell-off ended, it literally took less than 3 months for the HUI/XAU indexes to double from their bottom and then head to new all-time highs a few years after that. I feel bad for anyone who was shaken out this time around, but I guarantee you that Wall Street does not harbor the same sympathies...
At any rate, what's been exposed from this market price correction is the fact that 1) more people now understand why it is important to own physical gold and silver, as evidenced by the fact that the U.S. mint quickly sold out of silver eagles and is on a track to sell a record monthly amount of gold eagles; and 2) there is a serious problem globally with the amount of gold that is available for physical delivery to the buyers who are demanding actual delivery.
I thought I would go over some statistics from the Comex to illustrate why we know this is the case. The total gold held on the Comex is 8.5mm ozs, of which 6.3mm is not available for delivery - i.e. it's investor gold being held in Comex vaults. Stunningly, over 2 million ounces of gold - roughly 60 tonnes - has been removed from the Comex vaults in the last three months. Most of it has come from investor accounts. You have to wonder why all of a sudden big investors have removed their gold from the Comex.
Investor gold is not "eligible" for delivery on futures contracts. The gold that can be delivered is sitting in "registered"accounts. The amount of registered gold currently is 2.28 million ozs. The total open interest in futures contracts for gold is 416k contracts, or contracts representing 41.6 million ozs. Essentially there's 18x more paper gold in the form of futures open interest than there is gold that can be delivered. The June front month for gold has 255k open contracts, or 25.5mm ozs open. That's 11x the amount of gold available for delivery. If even 10% of June gold contract longs held for delivery, the Comex would be completely wiped out of its gold and would have to default on the delivery of some. But the Comex has a "force majeur" clause in its contract that allows cash settlement. We won't see that happen in the near future most likely, but it will eventually happen.
In silver the total open interest represents 786.3 million ozs. That's about 3/4 of global annual production, which includes 257mm ozs of recycled silver. So, the total open interest on the Comex is about equal the total annual amount of silver mined globally. There's 39mm ozs of silver available for delivery. In other words the amount of paper silver on the Comex is 20x the amount of silver the Comex has for delivery.
I think that explains why big investors are removing their gold from the Comex. The Comex is one giant Ponzi scheme. Anyone who is going to rely on the Comex as a source of silver, either industrial or investment, is going to be left holding a giant, empty paper bag. That explains why we are seeing a such frenetic activity - not just in this country but globally - by investors looking to get their hands on gold/silver that can be physically delivered into their possession. A long-time colleague of mine prepared this caption, which sums up the situation perfectly:
As the severity of the physical gold/silver shortage vs. the paper claims issued (futures, LBMA forwards, OTC derivatives and Central Bank leases and swaps) against that actual amount physically available - as demonstrated by my Comex example, which is only part of the global problem - the price of gold and silver is going to start to go parabolic. Although most of you are not aware, but from 1974-1976, the price of gold dropped 47%. But from 1976 to 1980 the price of gold went up 800%. Given what we know about the massive, unsolvable global financial problems, and the enormous amount of money that will have to be printed to keep the system from collapsing outright, it's a good bet the next extended move in the metals will dwarf the move gold made in the late 1970's.