WHERE ARE THE BULLS? / MACLEOD FINANCE

Where are the bulls?

Comex is effectively the largest gold and silver mine, with stand for deliveries a source for bullion. The conversion of paper gold and silver into bullion is now conspicuous. It cannot last.

ALASDAIR MACLEOD

As our headline chart illustrates, gold and particularly silver have had a good week with prices continuing to rise. 

In European trade this morning, gold was $3860, up $101 from last Friday’s close. 

And silver at $47.33 was up $1.30 on the week. 

So far this year, gold is up 47% and silver by 63%.

The question on everyone’s lips is will it continue?

The answer appears to be in the affirmative. 

Look at the relation between Comex open interest and the price in the silver contract:

The 63% rise in silver has been driven by a massive bear squeeze on Comex and not speculator interest, which has broadly moved sideways for the last eighteen months. 

In theory, bullion banks run short positions on Comex to hedge their longs on the LBMA. 

But backwardations and high lease rates in London tell us that this is not so: the bear squeeze is on London as well. 

And while the shorts appear to be holding their ground by containing open interest, the damage to them is from soaring prices.

This contract has turned into something no one expected, and that’s a delivery mechanism for buyers demanding physical bullion. 

This week, stand for deliveries for silver in the first four days were for 393 tonnes, making the total for the year 11,244. 

This is 60% of estimated total mine production this year so far. 

In effect, Comex is the largest silver mine in the world, and the strains are beginning to show.

Similarly, with gold. 

The first four days of this week saw stand for deliveries totalling 86.6 tonnes, taking the annual total to 990 tonnes. 

This is three times China’s annual output, making Comex the largest gold producer as well. 

The relationship between open interest on Comex and the price is next:

Here again, while open interest is volatile, its declining trend while the price rises is clear evidence of a systemic squeeze on the establishment bullion bank traders, not being driven by speculative demand. 

Indeed, within subdued open interest, there are shorts in the speculator category totalling 92,088 contracts on the last Commitment of Traders report (23 September). 

They will be praying that they are not going to be asked to deliver gold which they obviously have not got. 

And they should buy back these positions if they do nothing else.

The value of gross and net shorts in the swaps category is at all-time highs and must be hurting badly on every $100 jump in the gold price:

The gross short position is costing 28 participants a total of $108.5bn. 

That is over three times pre-covid levels.

Covid lockdowns certainly destabilised the global economy, leading to an explosion of debt in welfare-driven nations. 

It is this explosion which is flooding the world with credit, distorting asset values and undermining currencies’ purchasing powers. 

This debt-cum-credit bubble is breaking apart the fiat currency system, as China, Russia, and their cohorts in the Shanghai Cooperation organisation, BRICS, and the wider lobal south all run for cover.

So far, western investors appear to be blissfully unaware of what is happening, but some are just beginning to realise they should be buying gold, or if they feel the need to catch up perhaps some silver. 

Demand for ETFs are the best indicator of this awakening demand. 

But as the World Gold Council’s chart shows, the amounts going into ETFs are still derisory in the context of global portfolios estimated at over $300 trillion.

Portfolio adjustments in favour of gold, silver, and commodities generally are yet to come. 

And when it does, Comex and London are bound to face far greater challenges than an old fashioned bear squeeze.