Wednesday, May 8, 2013

The Truth About The Gold Being Drained From GLD

In over 30 years of studying, researching, trading and investing in the financial markets, I have never seen the contrarian signals flashing as bullishly as they are for gold right now.  -  Link: Update On Gold: Is This The Bottom?

It's really quite astonishing.  Especially the degree to which the negative media reports - especially from Bloomberg News and CNBC - are piling up like dead bodies in the aftermath of the Mt. Vesuvius eruption.

I want to "connect some dots" for everyone who has been worried about the rather large liquidation of gold from GLD.  In fact, media citations of this gold drain have proliferated like the odor of burning marijuana in the streets of Denver now that pot has been legalized (trust me, it's everywhere).

But what is really going on?  Let's look "under the hood" at some relevant information that is being left out of a lot of the financial reporting in the U.S.  To begin with, the way gold is put into or taken out of GLD is via the Authorized Participants.  These are the primary market makers in GLD shares.  When they collect a basket of 100,000 shares from buyers or sellers, they take the cash proceeds and either buy gold to move into GLD or buy gold from GLD to remove the gold from the trust.  The current list of AP's, at least according to GLD's latest 10-K filing are:  Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sach, HSBC, JP Morgan, Merrill Lynch, Morgan Stanley, Newedge (a online hedge fund oriented futures bookie), RBC, UBS, and Virtu Financial (another online hedge fund bookmaker).

If the price of gold - for whatever reason, legitimate or not - gets crushed, it will tend to generate a lot of selling in the shares of GLD.  In turn, that will generate the ability of the AP's to collect 100,000 share baskets and convert those baskets into gold that is removed from the GLD vault and into the "custody" of the specific AP who is turning in the shares.  At today's price of gold, 100,000 shares represents about $14.2 million - 9,627 ozs of gold, or roughly .29 tonnes.  Since the beginning of the year, roughly 293 tonnes of gold has been drained from GLD, which had 1350 tonnes in it - allegedly - on 12/31/12.  Nearly 30% of the total amount of gold that has been drained from GLD occurred in the 3 weeks since the April 16-17 price massacre.

So where, you might ask, is all this gold going?  It's not just vaporizing into thin air.  Using today's price of gold, 293 tonnes is worth about $14.5 billion.  If you look at that AP list above, all of them except the two hedge fund bookies are LBMA "bullion bank" market makers.  Unless these bullion banks are keeping the gold for themselves - and if any of them were, it would have to show up in the footnotes of their next 10-Q - that gold is being delivered to buyers of it on the other side.

So, who would be buying this gold?  Based on numerous news service reports, which often seem to never make their way into the U.S. financial media reporting, India and China combined through the end of April have imported somewhere around 700 tonnes of gold, plus or minus 100 tonnes.  What's 100 tonnes among bullion bank friends when GLD still has 1,057 tonnes left?  Here's one news report - actually from Bloomberg - which is calculating that China purchased around 223 tonnes of gold in March alone:  LINK  That is a staggering amount of gold (mostly 400 oz bars - the type of bar in GLD's vaults) when you consider that the global annual mined production of gold is around 2500 tonnes, and declining. 

And here's an account out of India about the massive gold demand there in April and May:
 “The biggest slump in gold prices in more than three decades on April 15 spurred banks, traders and jewelers to import more than 100 tons last month, said Rajesh Khosla, managing director of MMTC-PAMP India Pvt. Purchases this month will match April’s imports, he said”
And here's a refreshingly honest assessment of the situation from an Indian newspaper:
The jump in Chinese physical demand also prompted some banks to ship in more supplies from London and Swiss vaults, traders said  LINK
If you read that entire article, you'll see that in 2012, India/China imported more than 1/3 of the global  gold production and will likely account for close to 50% this year.  This is the unintended consequences for the Central Banks who are spear-heading the manipulation of the price of gold for the purposes of defending the dollar and fiat currencies.

This rabid demand for 400 oz. gold bars from China/India (not to mention Russia, Turkey, Viet Nam, pretty much all of southeast Asia) goes a long way toward explaining the rumors that were circulating during February and intensified in March that the LBMA was in danger of facing a big delivery default.

Layer on top of this the fact that many wealthy families in Europe are now demanding delivery of the gold bars that JPM and other bullion banks are holding custody of.  The report on this from my friend was confirmed independently by a source of Bill Murphy's over in Europe.  This is exactly why ABN/Amro announced a week before the $200 hit on gold that they would no longer deliver physical gold from their gold investment account product and would instead only settle redemptions in cash.  That product catered to high net worth investors over there.  ABN didn't have the gold that would be required to satisfy delivery claims.  It was a fractional bullion investment account, just like all the other big bank "bullion" investment products.  Morgan Stanley settled a lawsuit several years ago for this type of scheme using silver.  But they never admitted guilt.

So in connecting all the dots, there is no question in my mind that the big price smashing of gold in mid-April was an operation designed to shake loose enough 400 oz. gold bars out of GLD in order to satisfy the enormous delivery demands coming from Asia, India and even within Europe.  GLD is the only possible source of above-ground 400 oz. gold bars that could be used to satisfy this enormous demand for physically deliverable bars.

At some point, and probably sooner than most people are willing to believe, this physical demand is going to force an upward "explosion" of the paper derivatives being used to hold down the spot price right now.  In 30 years of studying and trading the financial markets, I have never seen contrarian indicators for any market sector flashing as bullishly as they are for gold and silver, which further confirms my view that the metals have bottomed and are getting ready to give those of us who held on the ride of a lifetime.

26 comments:

  1. Rocky Mountain High, dude.

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  2. Party on Wayne....

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    1. Nice website. I'll check it out more later when I have more time!
      Also, people are waking up. In groves. Prepping, Arming and Stacking (PM's)! America will be great again some day. We need to abolish the FED and give Washington DC a giant Enema!

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  4. Dave

    I'm not sure I quite follow the reasoning there at the 2nd to last paragraph.
    Why would satisfying Chinese demand be so important as for someone to bring down the Paper price and free up gold from GLD.

    COMEX APs aren't bound to satisfy foreign demand.
    Are you insinuating that buying on the LBMA (and the buyers asking for delivery) meant the the LBMA principals asked for or forced a drop in the price of gold knowing from experience that it would likely cause GLD selling and allow them to "skake loose" some physical?

    Who are the principals behind the LBMA? Is it essentially the APs of GLD?

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    1. i explain it all in my post dude. Forget the Comex. The Comex is a paper fraud. Asia is demanding 400 oz. bars. The only source to supply the demand that has been created by the low price is GLD.

      Yes, I'm saying that JPM/HSBC needed to shake loose bars from GLD in order to make deliveries. There have been several different accountings that the LBMA was short on bars to deliver and in danger of defaulting. I've heard some stories that I won't share that will make the hair on the back of your neck stand up.

      If you think for one minute that GLD has all the bars it's supposed to have you are either naive or you don't do research. Yes, all the bars may or may not be sitting in GLD's vaults, BUT how much of that gold has leasehold claims on them?

      No one can answer that and the parties involved won't answer that.

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    2. Dave, I think leasehold claims don't matter. GLD is a bona fide purchaser. Even if some of the bars have leasehold claims on them. They are still the property of GLD. GLD is free to do anything to these bars.

      http://en.wikipedia.org/wiki/Bona_fide_purchaser

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    3. But gold lease is usually through unallocated account. The lessor has a claim over the stock of the bullion bank but not specific bars. I don't think specific bars will have leasehold claims on them.

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    4. Depends. Central Bank bullion can be leased and can stay in the Central Bank (if it exists), in which case the Central Bank have a charge over the bars leased and a charge over the cash assets of the bullion bank lessee. The lessor (Central Bank) has a charge over the assets of the bullion not just the stock if physical actually passes hands.

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  5. A most excellent post Dave... as I posted on the Martenson Peak Prosperity website (where I post as Jim H), we had been discussing the GLD pukes last week.. and I believe your explanation makes the most sense, i.e. Occam's razor perspective. Nice pop today showing us that Gold is not in fact dead : )
    I Kg Lunar Dragon

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    1. Thanks for feedback LD - appreciate it!

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  6. Hi Dave,

    You say '' this physical demand is going to force an upward "explosion" of the paper derivatives''. This is a position I never understood. Every way I look at it seems to me that once trust in papergold is lost it will be dumped en masse. Considering the huge amount of leverage of paper vs physical I dont see how the paperboys can make the paperprice skyrocket to keep up with the physical once the ''rotation from fiction to real'' happens. To me the only way this monster can resolve itself is to have the paper vs metal price crater and papermetal being discredited alltogether in the end.

    I would enjoy your take in more detail on why papergold will keep up with the price of physical. To me this position is hard to gasp. If I may be so free, I think you do your readers a favor to at least let them consider the option that papergold will crater and physical will soar. Makes them stronger hands (smile).

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  7. The recent Karen Hudes interview is some nice icing on all the suspicions. The people who run the Ponzi on us at the highest levels are getting nervous and there are even profound philosophical conflicts among the elite themselves. Who knows how many chairs there really is in this big, crowded room at this point. With seemingly everyone in a slow-motion play to lunge for one, it's getting interesting eh lads (and ladies?)?

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  8. I think the big problem is that the upward price explosion will not result in possible realized gains, as the government will either tax the crap out of it or confiscate the metal outright to fight "domestic terrorism"

    No way to get it out of the USSA either....

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  9. Madoff was a piker compared to the gold manipulators. Hopefully we will see the fall of London Gold Pool II

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  10. Dave, thanks so much for your blog and analysis. I have read way too many price trend predictions over the last two years that have been basically 100% wrong by a lot of people in this sector. I know you aren't selling anything so yours aren't hype based, just on your analysis, so here's to hoping you a right. Watching the real estate prices go up like crazy in my local area (while I rent) and the Dow go higher while I watch the value of my assets in gold and silver go down (thinking I am doing the right thing by being in this sector and out of real estate and the stock market) is flat out depressing. All of us are ready for a turnaround! Hope you are right.

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  11. ABN Amro story is a non-event, more information in this link:

    "ABN AMRO has not provided these services directly since the sale of HBU, so there is no change to our offering – only to the facilities provided by Deutsche Bank. We have also found a new provider for these services, that is UBS."

    http://forexmagnates.com/abn-amro-halts-physical-gold-delivery-another-sign-all-trading-is-simply-for-pieces-of-paper

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  12. Yes but what about silver? SLV is not going through the same experience that GLD is. The COMEX is losing over one third of it's eligible silver this month. The demand for eagles is taking out the Defence Strategic Reserve which hasn't provided resource data since 2003. SLV apparently has 350 million oz's of silver but no drawdowns are taking place. Sprott appears to have been taken to the wood shed, maybe it's being wheeled out of the back door of PYS or even CEF. Please don't tell me that's illegal - no company I have ever worked for has worried about that when they are in the wood shed with the chopper. Maybe Sprott is just front running his client base into the woodshed with Rick Rule forking over the corpses, who knows?

    Nevertheless the slight drop in Indian jewellery sales doesn't account for the loss of Bingham Canyon and Pascua Lama. From all the smoke, silver should be running on empty and yet SLV doesn't get raided. Maybe it doesn't have any silver at all, certainly if it did they could put out the fire in silver for several years.

    So what's the skinny on silver? Who knows. Certainly not David Morgan who keeps telling us the COMEX can't default because:

    1. Only 7.5 million oz can be taken out at once.
    2. The COMEX can change the rules.
    3. The can go to a 100% or more cash margin.

    Well these things were true for Bunker Hunt but they are not true for Ted Butler's raptors who have seats on the Board of the exchange and can block trading changes. The raptors own depositories and can collect eligible silver in their own warehouses so they are not taking silver off the exchange. None of these arguments are worth a row of beans in the present situation.

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    1. Eric Sprott cashed out $46,258,984 worth of shares in SLV several days before the price cratered. Coincidence? Only if you believe in fairy tales.

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    2. LK, have you ever talked to Eric about that? I have. He sold those shares that were in a charitable trust because the trust needed the money. In the context of that fact, your comment is inappropriate.

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    3. Maybe they were and maybe they weren't. I appreciate LK speaking up w/ some info.

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  13. With as much contempt as I have for these Wall Street criminals I grudgingly have to give them credit. The creation of the SLV and GLD ETFs was pure genius. These two fraudulent entities allowed the bullion banks to fool people into thinking they were investing in real silver and gold. No insurance or storage issues - just an easy, convenient way to own silver and gold with the click of a mouse. Not only do the prospectuses state ownership only allows exposure to the PRICE of each metal, only the really big players "authorized players" can convert ETF shares into physical as you explain. In addition to providing bullion to Asian markets as you indicate, I wonder if some of this bullion finds its way to the Comex to fulfill orders for delivery, or is sold into the open market to further depress the paper price. So people thinking they are investing in metals might actually be enabling this price suppression scheme to continue. Brilliant! Oh and I love the fact that the main custodians of these two ETFs are none other than HSBC and JP Morgan, but you can be sure there aren't any conflict of interest issues!

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  14. If we a major physical delivery failure, and the result is that the COMEX declares force majure and forced paper delivery vice physical, then the the futures value could collapse to near zero instead of rising. If the futures market is shown to be the fraud it is, the value of those futures contracts will go to zero, but the price of delivered physical gold will skyrocket.

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  15. Hugo's comment above os interesting. I have read many gold blogs and sites and some of them think that all gold prices will sky rocket (paper and physical) and some bloggers (precious metals pete and FOFOA) think that paper gold prices will tank and physical prices are going astronomical... What's Daves take on this?

    Btw.. Personally I am a stacker of phyzz, 2.5-5 grams/month,modest,but what's a worker gonna do....

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  16. Ein wirklich sehr interessanter Artikel. Ich beschäftige mich gerade auch intensiv mit dem Thema Gold! Gold wurde in so kurzer Zeit vom „beliebtesten“ zum meist „gehassten“ Investment. Immer wenn ich so etwas lese, reizt es mich noch mehr in solch Asset Klassen zu investieren. Der aktuelle Goldpreisrückgang ist charttechnisch gesund … ich befürchte sogar, dass ein bewusster Kursrückgang erfolgen musste / sollte / soll … Gold wurde im letzten Jahrzehnt einfach zu stark, beinahe kann man es als Gegenpol zum herkömmlichen Papiergeldsystem verstehen. Zur aktuellen Goldpreisentwicklung kommt der prophezeite Fed-Gelddruck-Ausstieg auch gelegen … bevor ich diese Ansage jedoch glaube, will / muss ich es erst sehen. Schlussendlich finde ich selbst, dass ein bewusster „geringer“ Prozentsatz an Edelmetallen, hier vor allem Gold, in keinem Depot fehlen sollte … sei dies auch nur als Absicherung gegen das Schlimmste – Gold muss man wie eine Versicherung sehen – man hofft ganz einfach, dass der Extremfall nicht eintritt – und wenn doch, kann man auf Gold / die Versicherung zurück greifen.

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