Seeking Alpha

Dave Kranzler's  Instablog

Dave Kranzler
  • on Real Estate
Send Message
I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for a large bank. I have an MBA from the University of Chicago, with a concentration in accounting and finance. Currently I co-manage a precious metals and mining stock... More
My company:
Golden Returns Capital
My blog:
Investment Research Dynamics
  • The Comex Is One Big Ponzi Scheme 2 comments
    Apr 29, 2013 6:58 AM

    When it becomes widely known that all of the people who think they own gold in fact don't own gold, that it's been hypothecated and re-hypothecated so many times that there are 100 claims for every single ounce of physical gold, that is when the prices of gold and silver will really go berserk to the upside, and at that point the shorts will have serious problems - John Embry on King World News

    The press pounced all over the massive smack down on gold/silver last week. Headlines were thrust in everyone's face. Gold dropped $200 dollars in two days and the media wanted to make sure everyone knew about it. Well, guess what? As I write this, gold has gained back over 50% of that two-day, $200 price drop.

    In the aftermath of that sell down, a lot of facts have come to light. But first, the bounce we're seeing is illustrative of the fact that you need to hold on tight in this sector in order to truly benefit from the wealth benefits of investing in physical gold/silver and good mining stocks.

    What's been exposed from this market price correction is that 1) more people now understand why it is important to own physical gold and silver, as evidenced by the fact that the U.S. mint quickly sold out of silver eagles and is on a track to sell a record monthly amount of gold eagles; and 2) there is a serious problem globally with the amount of gold that is available for physical delivery to the buyers who are demanding actual delivery.

    I thought I would go over some statistics from the Comex to illustrate why we know this is the case. You can access daily open interest and warehouse stock reports here: Open Interest and Warehouse gold/silver stocks.

    The total gold held on the Comex is 8.1mm ozs, of which 6.3mm is not available for delivery - i.e. it's investor gold being held in Comex vaults. Stunningly, over 2 million ounces of gold - roughly 60 tonnes - has been removed from the Comex vaults in the last three months. Most of it has come from investor accounts. You have to wonder why all of a sudden big investors have removed their gold from the Comex.

    Investor gold is not "eligible" for delivery on futures contracts. The gold that can be delivered is sitting in "registered" accounts. The amount of registered gold currently is 2.28 million ozs. The total open interest in futures contracts for gold is 416,000 contracts, or contracts representing 41.6 million ozs. Essentially there's 18x more paper gold in the form of futures open interest than there is gold that can be delivered. The June front month for gold has 255,000 open contracts, or 25.5mm ozs open. That's 11x the amount of gold available for delivery.

    In silver the total open interest represents 786.3 million ozs. That represents about 3/4 of global annual silver production, which includes 257mm ozs of recycled silver. So, the total open interest on the Comex is about equal the total annual amount of silver mined globally. There's 39mm ozs of silver available for delivery. In other words the amount of paper silver on the Comex is 20x the amount of silver the Comex has for delivery.

    If about 9% of the June gold contract - and 5% of the July silver contract - longs were to hold for delivery, the Comex would be completely wiped out of its gold and silver and would have to default on the delivery of some of that metal. the Comex has a "force majeur" clause in its contract that allows cash settlement if there's some kind of "act of God" the prevents delivery of the physical metal being demanded. We won't see that happen in the near future most likely, but many of us who have analyzed this market for over a decade believe that at some point the Comex will find a reason to invoke this clause rather than face outright default.

    As demonstrated by my Comex gold/silver inventory example, and by the recent shortage of U.S. minted silver and gold eagles, the amount of physical gold/silver that is available to deliver into investor/end user demands is becoming more scarce

    I think that explains why big investors are removing their gold from the Comex. The Comex is one giant Ponzi scheme. Anyone who is going to rely on the Comex as a source of silver, either for industrial/jewelry manufacture or for investment, is going to be left holding a giant, empty paper bag. That explains why we are seeing a such frenetic activity - not just in this country but globally - by investors looking to get their hands on gold/silver that can be physically delivered into their possession.

    The Comex is only part of the problem. As the severity of the physical gold/silver shortage vs. the paper claims issued (futures, LBMA forwards, OTC derivatives and Central Bank leases and swaps) against that actual amount of physical gold sitting in bank vaults that can be delivered into delivery demands by investors, the price of gold and silver is going to start to go parabolic, as those who want to own physical metal in their possession chase the price higher to achieve that goal.

    Although most of you are not aware, but from 1974-1976, the price of gold dropped 47%. But from 1976 to 1980 the price of gold went up 800%. Given what we know about the massive, unsolvable global financial problems, and the enormous amount of money that will have to be printed to keep the system from collapsing outright, it's a good bet that the next extended move to a higher supply/demand equilibrium price level in the metals will dwarf the move they made in the late 1970's.

    The best way to play this coming move is get long GLD and SLV. More aggressive traders can get long call options on GLD, SLV. You can also speculate using gold and silver futures. Small accounts can trade the e-mini Comex gold/silver futures (32 ozs/1000 ozs), which are 1/3 and 1/5 the size of the big contracts respectively. My only caveat with using futures is that it is highly probable that we are going to see extreme volatility and wide price swings as the market goes into panic mode. If you use futures, make sure you leave enough margin cushion to avoid getting forced out of you position with margin calls. If you can successfully time a move higher, especially using big silver contracts, the amount of money to be made is spectacular.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: The fund I manage is long physical gold, silver, Comex futures and mining stocks.

Back To Dave Kranzler's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (2)
Track new comments
  • Gold bugs are one big excuse. Explain to me how the ponzi comex used paper gold and silver to push the price down in a false manipulation, and people are buying like crazy in the shortage market and prices have only recovered roughly 50%. Commodity contracts have always been large relative to the physical market, it's called hedging and speculating. The drop this month strictly chartwise looks like a major breakdown into a bear market. The bullish excuses that have.greeted the crash puts a lot of credence to that possibility.. The COT for gold is surprizingly only somewhat more bullish. But silver is in an area where $5-10 rallies occur, but you can't count on it if it is a bear market.
    29 Apr 2013, 10:51 AM Reply Like
  • Great article right on the money, great recommendations. Thx for pointing out the force majeur which forces the exchanges to settle paper traded contracts in cash
    30 Apr 2013, 05:02 PM Reply Like
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.