This writer will present the entire situation via a chronicle of all the news publications about the subject, providing dates sources and authors - where possible. Nearly all available information was researched from Internet sources. Most comments are verbatim from respective authors. Occasionally, this writer added comments of clarification and/or conclusions where the research leaves off.
Internet Commentary #18 -
Posted on the Internet February 22, 1997 by arden
Comex warehouse stocks are composed of two parts, eligible and registered. The total between the two is reported here almost daily by myself as a courtesy to my Kitco friends. If I do not make a post, it is either the fact that they are unchanged or that I am in the field (I am a geologist and do have to find gold once in a while!) If I do not post the numbers they can be found on Steve Kaplan's excellent web site or delayed from Bart's prices page. Look under FWN (which is Futures World News). This info is delayed six hours which used to really irritate me so I subscribed to the service, thus I get the info about 4:00 p.m. eastern time. Since I paid for it, I feel it is OK to pass it on to Kitco.
My main reason for doing this is because I think it is very important. Sometimes I have felt like a voice in the wilderness, but I think I am slowly getting converts. Let me explain my rational as follows:
As far as I understand (and this is based on some trading commodities experience) there are two ways to create a contract. First is to deposit money into brokerage firm as margin, then write a contract (which is a short). There are two classes of these 'writers', hedgers and speculators. Bonafide hedgers have different margin requirements than the speculator because presumably the hedger has the gold around somewhere (inventory, reserves, etc.) while the speculator is only betting on a price decline in the commodity if he writes the contract. The other method of creating a contract is to physically deposit gold meeting the specifications of the Comex contracts with a certified Comex warehouse. Then you may write a contract against your deposit. These I believe are the 'eligible' gold deposits, that is eligible to be delivered against a contract. The other form of deposit is 'registered' which I believe is simply gold on deposit in a warehouse with no obligations against it. This may be done for the simple function of security and ease with which to collect 'interest' on the gold by selling a future contract in a flat market. The warehouse charges storage and security fees I believe so its not a free place to leave your gold.
That leads us to our present situation. Currently there is 582,762 ounces of gold on deposit in Comex warehouses. Of this ONLY 323,111 OUNCES ARE 'ELIGIBLE' against an open interest of roughly 20 million ounces worth of contracts. In addition to the outright contracts outstanding, there are a huge number of calls at various strike prices. It is not uncommon for someone to write an out-of-the-money call without having the call covered by physical metal. The theory ( called delta hedging I believe ) is that you can always buy more metal as the price gets closer to the strike price. You can see how well this worked in the copper market last year with 'delta hedged' puts.
It is my personal belief that we are in an explosive situation and that the early warning signs are in the Comex gold warehouse stocks. I have poised this concern for nine months or more and have slowly watched people pay attention.
No my friends, I think the cupboard is BARE
and we will soon see the results!
Internet Commentary #19 -
Posted on the Internet February 22, 1997 by arden
Vieserre - you miss my point a bit and its my fault for not expressing it better. The Comex gold stocks and inverted pyramid that they represent between physical gold and gold obligations are symptomatic of the entire world gold position! *We have heard that Central Banks in countries such as Brazil have written contracts for far more gold than they own.* If this were just some distortion in the world gold market ( Comex gold stock decline that is ) , then obviously there would be some arbitrage players involved like there is in so many stocks. I don't think so. I suspect the real situation with the LMBA is very similar to the Comex situation! Thank you for pointing out my omissions!
Internet Commentary #20 -
Posted on the Internet February 22, 1997 by Vieserre
The situation with the LMBA is profoundly interesting. How so much gold can be transacted in "deals" or "sales" without more attention being given publicly to the nature of the transactions is incomprehensible, particularly in the present economic environment where one almost daily reads that gold's usefulness as a financial asset is relic of prehistoric times. Since it makes for a great story, I would think a great number of people are diligently investigating, and seemingly someone by now would at least come up with a 'Deep Throat.' The participants must have deep pockets such as CBs and the like, but if so, why would they not deal directly with one another and not through an exchange, unless they desire anonymity which may support the China connection. I wonder. Why would the LMBA suddenly make the annoucement? An explanation of calling attention to the world of the importance of the exchange does not have superficial merit. If they have so much business, why do they need to champion themselves; and since parties making the transactions would presumably desire anonymity, they are not currying favor with their clients by the disclosure.
by disclosing the information?
Internet Commentary #21 -
Posted on the Internet April 1, 1997 by Vieserre
@the Rigged Market:
Have you considered how bullion is marketed: Bullion dealers are often banks or entities owned by banks, the major wholesaler are Swiss Banks and their owned refineries, banks control most of the world supply, London price fixes are made by banks, the LBMA is comprised of banks, most physical gold is traded through the LBMA, in some countries all gold produced is marketed by the bank, and I am told a producer's output is sold by its refinery at the then prevailing price without negotiation of price. Do you think this means anything. (:-))
Internet Commentary #22 -
Posted on the Internet April 5, 1997 by Cmax
On January 29, the London Bullion Market Association confirmed that 30 million ounces (approx. 930 tons) of GOLD were being cleared per day through their organization alone. They are primarily a physical clearing house, so obviously, these extremely high volumes would not indicate gold hoarding, but that gold being used as a form of currency for the payment of commerce (money).
world volume would be 3 to 5 times this
daily amount. Again, there is a huge
undercurrent of gold volume, and no one
is listening, especially the paper markets.
Internet Commentary #23 -
Posted on the Internet July 27, 1997 by Cmax
The issue on LBMA or OTC trading vis-a-vis the Comex with regard to price leadership is a question I have raised repeatedly on this forum and elsewhere with no substantive response, except for Earl's amplifier hypothesis. (Red Baron comment: Unable to find Earl's comment) It is a missing link in my analysis, one that I have seen no analyst touch on, and one which I would appreciate your comments on if you find an answer.
Internet Commentary #24 -
Posted on the Internet August 1, 1997 by Vieserre
The LBMA Puzzle and the Dachshund:
Thanks for the earlier comment, sorry I have not gotten back to you sooner on the LBMA. There is a lot I do not understand about the gold markets but the LBMA is biggest puzzle. To consider that over 930 tonnes of gold - equivalent to over 10 billion dollars and the entire reserves of the European Union Central Banks - is traded "each day" is mind boggling. Yet so little is said about this "behemoth" as to who the traders are and the purpose of the trades. And why the COMEX should be able to wag its tail since it is a Dachshund in comparison, as C-max put it, is indeed perplexing.
|In an attempt to make sense of this, I view the gold market as having several basic types of supply/demand components. The first is what everyone reads about: producer supply and scrap on one side, and fabrication demand on the other. A second type rises from CB's adding to or reducing gold reserves. And this together with the first is often massaged and misleadingly reported to support the spin that the media or commentator desires to make with respect to gold supply and demand. And depending on the spin, one could believe that there is a huge deficit, a modest amount or a surplus. The third type which I believe is most important is investment supply and demand on which I have not seen much published except for related speculative buying and selling on the futures exchange. I view gold hedging in the same manner as naked speculative buying and selling. It may temporarily affect price when being implemented or unwound, but it does not affect price based on physical supply since it neither adds to or reduces total supply.|
Trading directed to each of the above is evidenced both on the COMEX and the OTC market, but most trading appears to take place on the OTC. Some of the LBMA trading may relate to OTC forward contracts being implemented by producers and speculators both on the long and short side, not unlike undertaken at the COMEX. However, major players may prefer the OTC as there is no particular contract month to be concerned with, there is anonymity, and one can contract directly with a party of his choice, among other reasons. Then there simply may be other traders who buy and sell on the LBMA spot market with little interest or impact on price - which may include producers, bullion houses, banks, and dealers. The producer has little impact on price since it sells its gold at the prevailing spot price. (It may however affect price by hedge timing, dependent on its expectation of future price.) The commercial dealer for the fabrication trade similarly will buy at prevailing spot in an amount that will satisfy fabrication demand at that price. Banks, bullion houses, dealers and the like may simply not care about price as they may be trading risk free by passing the risk on to others. THUS A LOT OF TRADING CAN OCCUR ON THE LBMA WITHOUT REGARD TO PRICE.
However, a trader that would be expected to trade on the LBMA, as well as on the COMEX, and who should affect price is the private investor or hoarder of gold. He does not have to sell or buy, and he will only do so at price which is based on his view of gold as a performing asset. And, it is this Investor who is believed to affect the margin, which usually determines price of most commodities. I have no knowledge of the amount of gold held by such investors, but my premise is that since 2/3 of the global gold supply is in private hands, it would seem reasonable that a sizable portion is held as private investment stock. And, these holders may affect price even though they may only trade among themselves.
the amount of existing gold in private hands at
about 80,000 tonnes - approximately equivalent
to 35 years of annual gold mine production
As to why the COMEX seemingly has such a large influence on price when considering its relative size to the LBMA, I suppose it is not unlike many other markets which are influenced by the futures markets. A price change, owing to the size and nature of trading would seem to be more easily accomplished on the futures market as opposed to the OTC market. But it may also be because a lot of the trading on the LBMA is done independent of price as above reasoned. In any event, a price change induced by the futures market should hold only if traders on the LBMA accept it, and that is based on the above cumulative trading considerations and others.
Since IMO the private investor is the sine qua non of price, if gold is to significantly increase in price, (other than for technical short covering) it is going to be because of conditions that make gold attractive as an investment other than for fabrication demand. Although fabrication demand is important, there is far too much gold to satisfy this demand alone for decades. But once gold becomes more attractive as an investment for other reasons such as inflation, currency revaluation and the like, it will rise in price accordingly. In addition such other reasons are also likely to discourage CB selling and producer hedging. IMO, since the investment community buys or sells gold based on such economical or financial expectations, axiomatically, it is why gold has responded reasonably well over the years as a leading economical or financial indicator.
The above collage is based primarily on supposition, many parts of which could be in error. Your comments are welcomed, as well as others on this forum who are more knowledgeable.
THE RED BARON
(September 29, 1997)
READER COMMENTARY IS INVITED: Just click the email icon at the bottom of this page.
(Coming in a few days Part - 5)