GOLD BULLION AND GOLD CREDIT / MACLEOD FINANCE

Gold bullion and gold credit

The current Comex crisis is the ultimate conflict between possession of bullion and unallocated bullion promises. That credit is now being called in, which is why bullion is demanded.

ALASDAIR MACLEOD

Over fifty years ago, the US Treasury moved to replace gold as the common international monetary reference with the dollar. 

Since then, the dollar has reigned supreme. 

It is taking only a matter of weeks to bring the post-Bretton Woods era to a crashing end. 

The implications go far beyond a little local difficulty for Comex’s gold contract.

Credit and bullion

In an earlier posting, I posited that the crisis in paper gold centres on “deliveries” of over 2,200 tonnes of gold over the last four years to market participants who stood for delivery. 

Putting together fragmentary evidence, it becomes clear that the conflicting interests of credit and bullion markets have come to a head. 

Since President Trump was elected on 5 November, the pace of these supposed deliveries has increased, particularly since the New Year. 

Up to 4 February, 204.8 tonnes have stood for delivery, an annualised pace of over 2,000 tonnes.

This increased pace appears to be causing huge problems for the Comex futures contract, which has risen to significant premiums over spot — a sign that the futures market is desperately short of physical gold. 

This is not a simple problem of not enough prudential cover for outstanding contracts, which are worth about 1,700 tonnes because the quantity of bullion being shipped into Comex warehouses is more than enough for that purpose. 

The chart below, from MacroMicro illustrates this history and the current position, of 1,034 tonnes which is 60% of the gold contract’s total value.

Comex warehouses aren’t short. 

Furthermore, it is suspected that JPMorgan and HSBC have been shipping gold bullion into their private New York vaults as well. 

Yet still, the panic for physical bullion continues, reflecting the crisis in 2020 triggered by covid lockdowns.

Reportedly, the premiums on the Comex contract have led to a global arbitrage which has cleaned out the London vaults of their liquidity, led to a run on the Bank of England’s vault in Threadneedle Street, and according to Reuters even led to Indian gold held in tax exempt bonded warehouses being tapped. 

It is a phenomenon which is draining the world of all its gold bullion liquidity. 

And still more is demanded.

The problem appears to be that gold which has been stood for delivery has routinely not been delivered. 

Instead, these participants have been given assurances in the form of certificates issued by bullion banks as evidence of their ownership. 

But a certificate is no more than an obligation to deliver. 

In other words, it is the equivalent of an unallocated gold account at a bullion bank as opposed to gold held custodially under bailment.

Standing for delivery does not extend to actual possession.

In normal circumstances, it might suit someone who has stood for delivery to accept a promise from a major too-big-to-fail bullion bank that the gold is safe, and that there is no need to take delivery nor to pay storage fees. 

But if that trust is eroded, either by systemic or political risk, then real delivery is likely to be demanded. 

And it is here that the ratio of stands for delivery to Comex warehouse stocks becomes important. 

Since January 2021 to today, that is 2,319 tonnes demanded which is covered by only 1,034 tonnes.

This was never a problem until covid lockdowns, when a similar crisis to that of today developed. 

As can be seen in the chart above, it led to a spike in warehouse stocks to 1,217 tonnes in February 2021. 

Since then, Comex stocks migrated to London and thence to Asia. 

At the same time, stand-for-deliveries were increasing as the table below illustrates:

Admittedly, we cannot know what has actually been delivered out of Comex vaults to those who have insisted on possession. 

We know from Kevin Bambrough’s posting on X (referred to in my earlier article posted 4 February) how difficult it is to take physical delivery out of Comex vaults with multiple hurdles placed in the way of doing so. 

And we don’t know how much of the gold might have been sold back into the markets. 

But the bulk of gold stood for delivery almost certainly still exists in the form of bullion bank promises to deliver.

It is easy to imagine how the election of President Trump with all the uncertainty that brings will have panicked those owning mere promises to seek physical possession. 

The only solution appears to be for gold to rise sufficiently to unlock enough bullion to meet this demand. 

But this leads to the additional problem of systemic risk from bullion banks not being able to deliver triggering a wider flight out of credit into gold, instead of out of gold into credit which would be profit taking.

Silver

From MacroMicro’s chart, we can see that there are 11,154 tonnes of silver in Comex warehouses. 

The stand-for-deliveries from 2021 to date have been 25,712.4 tonnes, similar to the gross value of Comex silver contracts. 

With silver having been in supply deficit for many years, the consequences for the silver price could be even more explosive. 

Undoubtedly, by withdrawing 665 tonnes from Comex warehouses between 16 February 2021 and 24 October 2024, much of the global shortfall was covered. 

That supply has been reversed into demand, a factor which appears to yet be reflected in the silver price.

It's not just gold…

There is a danger that with gold being central to the entire monetary system (it’s not dollars — that’s macroeconomic errors based on US Treasury propaganda), systemic problems in gold futures and forwards could undermine the entire derivatives complex. 

It is an integral part of the entire credit bubble, the order of which’s implosion will be revealed in time.