A DEVELOPING BULLION CRISIS... / MACLEOD FINANCE

A developing bullion crisis...

Apparently, the Bank of England is delivering bullion to be shipped to satisfy Comex demand. This is highly unusual and probably a sign of a very serious crisis developing.

ALASDAIR MACLEOD

The story coming from the media and analysts is that the enormous premiums for gold and silver on Comex futures are the consequence of rumours that President Trump will introduce tariffs, if not across the board, on Mexico (silver) and Canada (gold).

A moments thought allows us to dismiss targeted tariffs against Mexican silver and Canadian gold. 

They lose their identity when refined. 

As for general tariffs, that is almost certainly nonsense as well, because Trump has always said tariffs would be imposed on manufacturing, not commodities.

If tariff stories are just a smokescreen hiding the truth, then why are futures being priced significantly higher than spot, pushing effective gold lease rates through the roof?

We cannot know for certain, because bullion markets operate with high levels of public secrecy. 

But we do know that stands-for-delivery, which is when owners long of futures decide to demand bullion on expiry, have been running at extraordinary levels for some time. 

They began accelerating while gold moved up towards its highs last October, and have been accelerating ever since. 

Note that these stands-for-delivery may or may not leave Comex warehouses: it’s ownership that changes.

Obviously, a bullion bank’s leveraged short positions require some bullion cover, and it’s the stand-for-deliveries which erode it. 

This problem is faced by almost the entire bullion bank cohort, which is why the premiums on Comex contracts are not just an aberration.

So serious has the situation become, that according to the Financial Times there is now a queue of bullion banks at the Bank of England attempting to withdraw bullion, leading to a waiting time of between four and eight weeks.

Now, I have never been aware that commercial entities store significant amounts of bullion at the BoE. 

The Threadneedle Street vault is where the bank stores gold earmarked for other central banks and national treasury ministries. 

Commercially owned gold is stored almost entirely in LBMA approved vaults. 

There is some cross-over between vaulting systems, such as Bank for International Settlements dealings, and deliveries between vaulting systems. 

But primarily, on instructions from foreign central banks the Bank leases their gold to commercial bullion banks, the gold remaining in the Bank’s vaults. 

It is a book-entry transaction and the lessee is given documentary confirmation that it is entitled to the gold being leased. 

The lessee can then use that gold as if it was in possession over the duration of the lease, but the gold does not normally leave the Bank.

However, the lessee is entitled to possession and therefore delivery. 

That is now happening in substantial quantities, according to the FT article. 

It also tells us that while spot prices in London are merely being dragged higher by the developing crisis on Comex, liquidity in LBMA vaults has been tapped out. 

We now have a run on central bank gold reserves held at the Bank of England.

Talk about breaking the Bank. 

It looks like the gold bugs’ dream is finally happening. 

It is a panic which could drive gold and silver prices significantly higher, possibly leading to counterparty failures in London and New York. 

The consequences for the entire derivatives system don’t bear thinking about.