Thursday, January 16, 2014

Shortage Of Gold Bars Develops In London - Follow The Money

It appears as if that old adage that a rumor can't be confirmed as being true until its been officially denied several times applies to the London gold bar market, as it was reported last night by a London Metals Exchange reporter that premiums on "good delivery" bars are now above the spot price of gold, something which is rarely observed in London:  Gold Bar Shortage In London
Asian and Middle Eastern Central Banks and investors are hoarding an enormous amount of the 400 ounce  LBMA "good delivery" bars that make London the largest physical gold trading market in the world. As the price of gold was aggressively manipulated lower by the Federal Reserve and its agent bullion banks since mid-2011, eastern hemisphere sovereign, Central Bank and investment buying - especially the Chinese - intensified.

With negative "gold forward" rates having been negative for a predominant part of the last half of 2013,  I was wondering when a shortage of London bars would be reported. A negative "gold forward" rate means that the entity (bullion bank) who is borrowing or leasing the bars today in order to deliver them into buyers will pay more today for the ability to take delivery of bars now than it would cost to buy them for delivery in the London "forward" market - i.e. anywhere from a month to a year from now.

A rare premium for deliverable bars means a shortage of bars for immediate delivery -  directly to buyers not using an intermediary like a bullion bank -  has developed (as opposed to the GOFO rate, which applies to the brokerage firm intermediaries making markets in bars and who lease gold needed for delivery from Central Banks to deliver into the buyers who are buying from them).

We know that gold being drained from Comex warehouses and the GLD Trust ETF is being used to make good on deliveries into Asia's voracious appetite for deliverable gold.  Unless the Federal Reserve (Bank of England and ECB) can tap into new sources of above-ground gold stocks, we could well begin to see delivery defaults.

Over and above the reports of gold shortages from traders and market professionals, there have been other signs of a developing gold bar shortage for several months.  Recall the stunt Goldman Sachs pulled about two months ago when it reported in the press that it had reached an agreement with Venezuela to lease Venezuela's physical gold - the gold Venezuela had repatriated in order to safekeep it under its own watch just two years ago.  That news item dropped by Goldman turned out to false.  Same for the report that Cyprus was going to sell its gold reserves to help pay for its bail-in.  That report proved to be false as well.

I always believed that these reports reflected nothing more than desperation by the big bullion banks like Goldman and JP Morgan - as agents for Fed - to get their hands on gold that could be delivered to Asian buyers who demand delivery.   Same for the fact it the U.S. refused to give Germany back its gold being held by the Fed as requested and instead agreed to a suspicious deal to ship back part of Germany's gold over seven years.

While I'm sure plenty of skeptics from Australia to New York to will issue well-crafted rebuttals to the view that there is now a shortage of physical gold in London and New York, the report last night that big buyers are paying a premium to get their hands on immediately on physical gold confirms the obvious.  Money speaks a lot louder than words in the world of finance - follow the money...


  1. Dave, Jesse say's 112 to 1 at the Comex.

    1. Yep. I used to track the ratio but stopped because 1) I don't trust the numbers - they are reported by banks themselves - and apparently the CME doesn't trust the numbers as they stuck a disclaimer on the reports in June 2) the real paper/physical is likely much higher

    2. Yes I recall you commented on that issue and pointed out the inaccuracy of the Comex. It's all distorted bullshit these days. When ever I read information regarding gold I always rely on you and Jesse to get a real take on what's going on. Stay thirsty my friend.

  2. Dave, Thank you bringing this our attention... it all makes sense to me. BTW, you may be interested to know that little ole' me, who you know as 1Kg Lunar Dragon (aka Jim H), has gotten himself into a bit of a row with a certain Australian blogger. I am referred to near the bottom of this piece ;

    I would in particular like you to critique my reaction to one of the comments under the blog post referred to above... that being from a certain Kid Dynamite, who says;
    "1) PROOF that there is no "shortage" of 400 oz bars: PHYS trading below NAV. Q.E.D."

    My take just happens to be different (big surprise, right?) I am not sure why PHYS does trade at a negative NAV, but the degree of negativity is small (- 0.25%) and it is clear to me that once an entity paid all the necessary fees to Sprott for freeing up the bars, and the costs of bonded transport to get the bars out of Canada (remember, they are in Canada, outside the banking system... and in order to maintain LGD status, without being recast and re-assayed, they need to have a clear chain of custody thru bonded, system approved carriers like Brinks).. once you add up these fees you are well into the positive. All things considered.. the fact that many PHYS shares are in strong hands (like mine) and that if a large entity did go in and grab lots of bars, their anonymity would probably not be assured, I am not surprised that bars are not running out the door. It is interesting to note though that some small drawdowns have been made, even with the hurdles I mention. Does this all make sense to you Dave? Thanks, 1Kg

  3. From Australia? ;-)
    PM miners seem to be recovering nicely.

  4. Dave -

    thanks for the article over at Robert's site...
    probable the most articulate, precise and easily understood article on how the MoneyChangers scam works i have read to date....much props