The Gold Price vs. The Price of Gold

"Something different and, I believe, incredibly significant is happening here, and it goes back to that important distinction I made and promised to get back to: 'the gold price' vs 'the price of gold'.

'The gold price', as it is understood by most people, is nothing more than the quoted price of a gold futures contract on the COMEX exchange in the US. When you read that 'gold fell in overnight trading', what actually happened is that the price of a paper futures contract fell — not the metal itself.

'The price of gold', on the other hand, is what you will have to pay to get your hands on the physical metal itself, and that is a different thing altogether.

Despite the plunge in paper prices, 'the price of gold' remained remarkably robust." - Grant Williams

London Trader - We are Witnessing a Historic Bottom in Gold

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/12/20_London_Trader_-_We_are_Witnessing_a_Historic_Bottom_in_Gold.html

We are making a historic bottom right now.  The paper gold, or virtual gold market, has diverged so far from the physical market that it’s no longer a credible marketplace.  That’s the key thing that came out of a very important meeting I was in yesterday where we had some serious players.  The people I was meeting with are all on the buy side and have been since the lows last week.

There are massive physical orders, sitting, waiting for any more discounts, and yet everyone else seems to be short.  So you have huge fuel for a rally here. 

You have to keep in mind this recent plunge was orchestrated with borrowed gold and that borrowed gold is now gone.  That’s why gold can’t go much lower.  Any dips in price will be aggressively purchased.  As I said earlier, right now we are witnessing a historic bottom.”

What's in bold-face above is exactly what I've been forecasting for years:  the manipulated paper prices of precious metals will decouple from the physical markets due to shortages of the latter.

CFTC Delays Swaps Regulation By Another 6 Months To Comply With Wall Street Demands

The shiftless CFTC continues to let market manipulation run rampant at the COMEX, allowing their trading firm friends to continually rape and pillage other market participants deluded enough to believe futures exchanges are "free markets." 

http://www.zerohedge.com/article/cftc-delays-swaps-regulation-another-6-months-comply-wall-street-demands

JS Kim on Max Keiser, Discusses Banker Manipulation of Gold & Silver Futures

http://www.theundergroundinvestor.com/2011/06/js-kim-on-max-keiser-discusses-banker-manipulation-of-gold-silver-futures/

Revisiting registered silver in COMEX depositories

There are approximately 32 million ounces of registered silver in COMEX warehouses.  Each futures contract controls 5,000 ounces of silver.  Which means there is enough deliverable silver for 6,400 COMEX contracts.

The open interest was 123,000 contracts as of today.  126,000 contracts traded last Friday.

Normally, most COMEX contracts are settled via cash (rumor is that cash settlement premiums are up to 80% due to the shortage of physical silver).  However, if enough longs stand for physical delivery, the shorts don't have the inventory and the COMEX would have to default.  That can't be good for an exchange.

The supply/demand dynamic is already strained, and the price of physical silver is starting to bifurcate from the manipulated spot price.  A default would send physical prices soaring above the paper prices.

A default on silver or gold has never occurred at a major exchange.  There was a default on nickel at the LME in London in 2006, at which point nickel prices spiked.  The same thing will happen to silver if there is a delivery default at the COMEX.

Hong Kong Mercantile Exchange's 1 Kilo Gold Contract To End Comex Gold Futures Trading (And "Bang The Close") Monopoly

Long-term, this Hong Kong Mercantile Exchange will be just another vehicle for bullion banks to manipulate the paper prices of precious metals, but short-term, it provides competition for the LME in London and the COMEX in New York.  This is rather bullish for precious metals as the emerging countries in Asia are now the biggest buyers of gold and silver. 

http://www.zerohedge.com/article/hong-kong-mercantile-exchanges-1-kilo-gold-contract-end-comex-gold-futures-trading-and-bang-

Silver crash: The COMEX margin trick and Soros "rumors" worked well

http://www.ibtimes.com/articles/141891/20110505/silver-crash-comex-margin-trick-and-soros-rumors-success.htm

If the price of silver has plummeted, there should be a flood of supply out there, eh?  Well, look at Scotia Mocatta's website for silver products.  ScotiaMocatta is Canada's biggest precious metals dealer. 

https://www.scotiamocatta-estore.scotiabank.com/stores/scotiamocatta/catalog/catalog.aspx?nst=GXLqF7%2bdXVntKnBaWPeeeTETwfkd7uVq

As of today, they are sold out of every silver product--except for the 5 oz. bar.  This is more evidence that there is a shortage of physical silver, and that the paper prices at the COMEX do not reflect the reality of this shortage.

Paper vs. Physical Silver Prices

With silver prices plummeting at the COMEX, the price of physical silver hasn't dropped as much, creating a huge premium for physical bullion over spot price.  This is what silver bugs have predicting, as physical shortages don't follow the price manipulation of the paper markets.

Having said that, silver's stratospheric prices have encouraged scrap supply to come on-line.  Hence, prices for physical bullion (and coins) should drop relative to the COMEX futures prices over the next several weeks, shrinking the current premium over spot.  A period of consolidation to digest the incoming scrap supply is in order, with silver trading within a range, setting up for its next move above huge resistance at $50.  If it holds above the nominal all-time high, it's onward and upward with no meaningful resistance above $50.  Silver would then merely catch up to gold's record-breaking bull market.

See disclaimers in the side bar.

Disclosure:  long silver mining shares.

Silver is going parabolic: Futures trade at new ALL-TIME high this morning

http://www.thedailycrux.com/content/7508/Silver/eml

What is the difference between forward and futures contracts?

This is an important question, so I thought I'd elaborate on it.  In earlier blogs, I have speculated that JPMorgan has (technically) and will (outright) default on delivery of physical silver.  That's a pretty bold speculation.

What's even bolder is declaring the COMEX, the exchange where futures contracts are transacted, will also default on silver delivery.  A default by the COMEX would announce to the world that something is very wrong if the exchange itself cannot reconcile the default of one of its major members.  The credibility of the largest commodities exchange--and the global financial system, would be under fire should the COMEX default.  It would be a force majeure-type of event, and one the COMEX would have to declare after such an event.

According to Investopedia:

Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell a specific type of asset at a specific time at a given price.

However, it is in the specific details that these contracts differ. First of all, futures contracts are exchange-traded and, therefore, are standardized contracts. Forward contracts, on the other hand, are private agreements between two parties and are not as rigid in their stated terms and conditions. Because forward contracts are private agreements, there is always a chance that a party may default on its side of the agreement. Futures contracts have clearing houses that guarantee the transactions, which drastically lowers the probability of default to almost never.

Secondly, the specific details concerning settlement and delivery are quite distinct. For forward contracts, settlement of the contract occurs at the end of the contract. Futures contracts are marked-to-market daily, which means that daily changes are settled day by day until the end of the contract. Furthermore, settlement for futures contracts can occur over a range of dates. Forward contracts, on the other hand, only possess one settlement date. 

Lastly, because futures contracts are quite frequently employed by speculators, who bet on the direction in which an asset's price will move, they are usually closed out prior to maturity and delivery usually never happens. On the other hand, forward contracts are mostly used by hedgers that want to eliminate the volatility of an asset's price, and delivery of the asset or cash settlement will usually take place.

One can see in the bold-faced segment that the major difference between a forward and futures contract is that the latter is conducted in a clearinghouse or exchange, which in this case is the COMEX.  In a forward contract, either party may default, even if it is rare.

With futures markets, a default between two parties is even rarer because members need to pass minimum capitalization criteria, and because the COMEX has always stepped in and guaranteed the transactions, should one of the parties default.  But should the COMEX in turn default in delivery of said inventory (i.e. the buyer refuses cash settlement), the credibility of the COMEX itself would be in jeopardy, which would cause panic in commodities markets worldwide.

So a declaration that the COMEX could default should not be taken lightly.  It would be a major event.

Gold: 40 years of turmoil

http://www.telegraph.co.uk/finance/commodities/8432970/Gold-40-years-of-turmoil.html

This is a good summary of the history of gold in the last 40 years--ever since President Nixon took us off the gold standard.  However, a big omission in this timeline is the huge 30% correction in gold that occurred in the aftermath of the financial meltdown in September 2008.  Gold prices plummeted to $675/oz. (silver dropped in tandem to $9/oz.) at the COMEX in paper trading--even while demand for physical bullion was soaring.  Of course, this presented a great entry point as that demand eventually drove both gold and silver to quickly rebound with intensity.

In a liquidity crunch, all asset sectors sold off after Lehman Brothers collapsed, but the markets quickly regained their sanity and bid up the price of gold and silver as safe haven assets.  In the next market sell off, I expect the precious metals sector to temporarily sell off again, and I again expect it to be a great buying opportunity.  Of course, I could be wrong, and the markets could have "learned" from the last sell off, and immediately rush toward gold and silver, whereby the temporary correction will never unfold, causing their prices to immediately shoot up.  As a trader, it presents a dilemma.  As a long-term holder of tangible assets, it will be prudent to watch from the sidelines or even add to one's positions.

See disclaimer in the side bar.

Disclosure:  long precious metals mining shares, Ag, and Au.

If The CME Hiked Gold And Silver Margins By 50% And Nobody Cared, Did A Tree Fall In The Precious Metal Price Suppression Scheme?

Exchanges raising margin requirements usually tank the markets in question.  No such luck for the silver and gold shorts.

http://www.zerohedge.com/article/if-cme-hikes-gold-and-silver-margins-50-and-nobody-cared-did-tree-fall-central-banking-pm-pr

Now that JPM is out of the picture, the last recourse of gold and silver price suppression is exchange margin hikes. Or was. The CME has announced, that as of close today, it will hike various gold and silver (and other metal) contract initial and maintenance margins by 50%.... And nobody cared. This means the CBs are well on their way to losing the imposed gold standard wars.

Bullion Banks Get Smaller in COMEX Silver Futures

http://www.gotgoldreport.com/2011/02/bullion-banks-get-smaller-in-comex-silver-futures.html#tp

New Gold, Silver Rules, Little Change

http://www.numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=17219

The CFTC is at best, toothless, and at worst, corrupt.  Nothing here folks.  Forget about market transparency and fair price discovery mechanisms.  The markets are rigged, and will remain so, to the benefit of big bullion banks--and to the detriment of investors and industrial consumers.  The proposed position limits for commodities futures contracts in the Dodd-Frank Wall Street Reform and Consumer Protection Act are a smoke screen.  Investors will exit while the predators on Wall Street will feed upon each other.

First Nickel, Then Silver?

Does anybody think a default at the COMEX can't happen?  Read on.  Note:  The LME, unlike the COMEX, fixes daily prices for physical metals.  And yet, there was still a default.

http://news.silverseek.com/TedButler/1156198042.php

To see how prices reacted after the default in nickel in 2006:

http://www.kitcometals.com/charts/nickel_historical_large.html#5years

Note to self:  buy the physical bullion, not the paper futures contracts.

RICO laws invoked in silver manipulation lawsuit against JPMorgan and HSBC

http://www.prnewswire.com/news-releases/hagens-berman-sobol-shapiro-jp-morgan-and-hsbc-face-rico-charges-in-silver-futures-class-action-lawsuit-106624128.html

For the uninitiated, RICO laws are invoked to prosecute organized crime.

JP Morgan Chase & Co. (NYSE: JPM) and HSBC Securities Inc. (NYSE: HBC) face charges of manipulating the market for silver futures and options in violation of federal commodities and racketeering laws, according to a new lawsuit filed Tuesday in the U.S. District Court for the Southern District of New York.

The suit – which alleges violation of the Commodity Exchange Act and the Racketeering Influenced and Corrupt Organizations (RICO) Act – alleges that the two banks colluded to manipulate the market for silver futures starting in the first half of 2008 by amassing huge short positions in silver futures contracts they had no intent to fill, but did so to force silver prices down to their benefit.

The suit was filed on behalf of Carl Loeb, an independent investor in silver futures and options, by Seattle-based Hagens Berman Sobol Shapiro LLP, a class-action and complex litigation firm.

"The practice of naked short selling has long been a serious issue on Wall Street," said Steve Berman, co-counsel and managing partner at Hagens Berman. "What we know about the scope and intent of JP Morgan and HSBC's actions in this short-selling scheme dwarfs any other similar attempt to manipulate a commodities market."

The potential perils of paper gold and silver ETF's

I've blogged on this topic several times, and it's worth revisiting.

http://dailyreckoning.com/golden-shell-games/

The gist of the article states that the GLD and SLV ETF's are good proxies for the spot price of their respective precious metals, but in the event of "failures to deliver" physical gold and silver, the prices between the ETF's (paper contracts) and the physical prices would decouple, as the physical shortage would cause the prices of the actual metals to soar, while the ETF prices would languish. The reason is the precious metals COMEX futures contracts and ETF's are not backed by allocated bullion. They are derivatives, much like mortgage-backed securities were derivatives of the actual mortgages themselves. Buyers of said derivatives lost everything when subprime home borrowers defaulted on their mortgages. Holders of COMEX precious metals futures contracts, and the GLD and SLV ETF's would be similarly exposed to counterparty risks.

So if you believe you can trade the fluctuations of gold and silver prices, then the GLD and SLV ETF's may be a cost-effective trading vehicle. But if you are looking to hedge against inflation, currency debasement, and/or financial crisis, owning physical gold and silver may be a safer play, despite hefty premiums.

See disclaimers in the side bar.

Disclosure: no position in GLD or SLV.

CFTC and financial regulation reform

If CFTC Commissioner Bart Chilton is correct, position limits will be imposed and enforced for derivatives trading on commodities in the COMEX Exchange. Let's see if they enforce these new laws in the precious metals pits, forcing the big bullion banks (JPMorgan Chase and HSBC) to unwind their huge naked short positions.

I'm still wary of Commissioner Chilton's enthusiasm because CFTC Chairman Gary Gensler has talked a good game, but has been slow to respond to complaints of price manipulation. He's also a former executive at Goldman Sachs. Having said that, his predecessors were asleep at the wheel for decades--probably complicit in the price suppression schemes of gold and silver, so at least his acknowledgment that futures markets need more scrutiny against price manipulation is somewhat encouraging.



http://www.youtube.com/watch?v=K1_q88rlUkw

Jesse's blog on spot prices

http://jessescrossroadscafe.blogspot.com/2010/03/what-is-spot-price-of-gold-and-silver.html