On August 6, 2015, Goldman Sachs (NYSE:GS) and HSBC (NYSE:HSBC) took delivery of a sum total of 7.1 tons of physical gold. No, I have not made any typographical errors. And no, I am not talking about electronic paper claims. I am talking about shiny yellow metal stuff that you can touch and feel.
The gold bars were not purchased for bank clients. They were purchased for the banks themselves. How do I know this? They are designated by the exchange as being for delivery to the bank's "house" accounts at COMEX, not to client accounts.
Goldman Sachs, alone, took 3.2 tons worth of physical gold bars. Yet, even as the firm builds its stockpile, Goldman tells clients not to do it. According to Goldman's Jeffrey Currie, the long-term outlook for gold is bleak.
"In longer term, we definitely like playing this market on the short side. We think we are in a structural bear market, not only in gold, but across the commodity complex, as the individual commodity stories are reinforcing to one another, creating a negative feedback loop."
In spite of the antics in the paper-gold market, we know the physical market is on fire. Demand will exceed known supplies by at least 1,350 tons in 2015. More in 2016. But, that won't stop someone from setting up the paper market in order to buy from the physical market very cheaply. This is because the mysterious gold "supplier of last resort" will fill COMEX physical delivery demand, for the moment at least, no matter how high it rises, and no matter how low other supplies may be.
According to HSBC strategists, there has been a:
"drift towards Fed tightening and the associated USD strength, low global inflationary pressure, weak gold demand from India and China and market positioning and momentum."
This statement was made a few days before we all learned about the 61% increase in gold imports to India in the period, April to May. As one of the biggest players in the import market in India, how could have HSBC strategists not known about that? HSBC executives were certainly savvy enough to authorize this huge purchase of physical gold for the bank.
They bought 3.9 metric tons at COMEX, no doubt at rock bottom prices, and it was just delivered into the bank's house account. Note that we are NOT talking about paper-gold. Both bought physical gold bars! Apparently, top Goldman and HSBC executives are "gold bugs." They do not, apparently, believe in the promises made by the gold trust (NYSEARCA:GLD), or at least they are not willing to use the trust's shares as a substitute for hard metal bars.
Like Indian newlyweds, the banks buy gold trinkets hand over fist even as their "strategists" tell everyone it is a bad investment. Reports do indicate that the London market is caught in a historic backwardation, the likes of which have never been seen before in history. Arbitragers won't sell gold now, in exchange for a forward or futures promise of delivery. That illustrates an extreme level of market tightness.
My previous articles covered the situation in London. The use of logic, reason, common sense, and newly released transcripts, previously classified, caused me to conclude that the US government is currently the gold "supplier of last resort." You can find those articles here and here.
To summarize, COMEX is designated by the US Financial Stability Council as a "Financial Market Utility" (FMU). The Council was set up by the Dodd-Frank Act, and views any failure of this "too-big-to-fail" entity as likely to lead to widespread contagion in multiple markets. Thus, logically, the US Treasury is willing to, and is draining physical gold from the US gold reserve to bail it out.
Still, regardless of what the US government is doing, why would these two banks make such a huge long-term investment in physical gold bullion bars? Perhaps, we are seeing a "Big Long," similar to the "Big Short" Goldman Sachs is known to have taken in 2006/07. There are many who believe that we are soon going to see the collapse of a worldwide bond bubble, just as we saw a worldwide collapse of real estate values back then.
Maybe, these banks know something. Top bank executives don't appear to trust counter-party promises. For example, why not buy an equivalent amount of gold in the form of shares in a highly liquid, easily traded gold trust? HSBC is actually the custodian of the alleged gold bars inside GLD, so you would think they would view it just as good as gold? Apparently not...
Perhaps, then, the banks are filled with tinfoil-hat-wearing goldbugs? You have to wonder what they're worried about, because they're not buying paper-gold shares of (NYSEARCA:IAU) either. They are buying hard metal bars that they can fondle. Whatever is going on, it is a big deal because absolutely no one who really believes long-term gold prices will stagnant or decline would buy 7.1 tons of physical metal.
Physical gold is a long-term investment, everywhere and always. They are not particularly hard to sell, especially now, but short-term trading would be much easier with paper-gold products like GLD or gold futures. Remember, vaults cost money, as do big men with big guns and the knowledge of how to use them. The banks are choosing to accumulate and hoard physical gold bars for a reason.
Senator Carl Levin, writing in a Congressional Report, used Goldman Sachs as an example of everything that went wrong in the banking system. According to him, before the subprime crisis, Goldman Sachs secretly built up a massive short position in credit default swaps, convincing customers to take the other side of the trade. The bank ended up paying a record fine of $500 million for one instance of the trade. However, overall, they profited to the tune of tens of billions of dollars.
Are Goldman and HSBC now creating a "Big Long" in gold. If not, what are they doing? But, if so, why are they taking delivery on a regulated exchange? By using a public exchange, the banks opened their activities to advance scrutiny. Why not buy physical gold the way they bought credit default swaps? Why not use secretive two-party transactions?
The answer is simple. It is impossible. Backwardation in London shows that arbitragers are ignoring potential profits. They don't believe that a forward contract is reliable enough to return their metal. In contrast, COMEX now has an appearance of being backstopped by the US gold reserve, the "supplier of last resort" in the gold market. COMEX is designated as an FMU whose failure would lead to intermarket contagion.
The last place you want to be, when things "hit the fan," is on the opposite side of a "Big Long" trade. That's why, if you are now holding short positions, take your profits before it is too late. I discussed the details and various methods by which you can take a long-term position in gold here. To confirm the timing and size of Goldman Sachs' and HSBC's recent gold purchases, download this COMEX delivery report.
Disclosure: I/we 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.