Bill Holter

Gold and Silver Supply Is VERY Tight!

November 18, 2014

I mentioned earlier that I wanted to revisit the current GOFO rate situation and also the huge anomaly which occurred on the COMEX not once, but two days in a row to end last week.  I have written several times regarding "GOFO" which is the lease rate for London gold.  The last time I did this was back in May of this year, rather than writing another explanation I will copy and paste what was written then.  I will comment further after the May missive below:

COMEX backwardation and inverted GOFO rates should never ever happen in a normal world for any reason ever, but they have.  Why or how could this happen?  First let me explain "what" has happened, later I will explain "why."

GOFO rates had gone negative for 29 of the last 30 days before turning positive for the last two.  GOFO stands for "gold forward" rates.  In other words, when gold gets leased out there is interest paid by the borrower and received by the owner.  When these rates go negative it means that there is more interest payable (higher rates) to the holder of gold than to the holder of dollars.  You can look at this from several vantage points.  First and most obvious is that gold "supply" may be tight, in other words there may be difficulty in sourcing gold.  From another perspective, it can be viewed as too many are trying to exchange dollars into gold or that interest rates on dollars are too low (or could be too high for gold?).

The thing is this, you have always heard the saying, "but gold doesn't pay any interest or dividends" which is true... unless you are willing to lend it out for interest.  The easy way to understand this is that there are simply not enough lenders willing to lend their gold out into the market place which is another way of saying that supply is tight.  The risk to the borrower is that they might have to deliver higher priced gold while the risk to the lender is that they may never see their gold again.

OK, now let's look at the COMEX and the futures market.  Since you can lend gold out and receive interest for it, it then follows that "gold in hand" could (should) be worth more say six months down the line because it can be lent out and returned with an added 6 months interest attached to it.  This is why "futures" prices are almost always above the spot price for gold and silver.  This should ALWAYS be no matter what ...because they are "money" that are not subject to droughts, floods or whatever that can affect the supply greatly.  This is the case EXCEPT for couple of "mega sigma" events happening.  In one instance, it is possible that traders become fearful that they will not get delivered their contracted gold in the future which would make "gold in hand" worth more to them than the promise of future gold.  They may be fearful because they feel that the current supply is tight and are not sure that future supply will arrive or they may even be fearful that a system wide crash or default will occur before their contracted delivery which might leave them high and dry.  The big point here is that "gold in hand" can never ever be worth more than gold in the future (IF you know for sure that it will be delivered) because you can earn interest on it.

I have gone back and forth with several theorists as to whether or not we have already seen backwardation or not.  To their credit, we have not seen it yet in the out months but they are very flat.  So "flat" that we are only talking .50 cents or less for 6 months out.  But, here is where it gets interesting.  I spoke with a Chicago floor trader this morning who told me that he has actually executed 3 separate "back warded" gold trades since last June.  Normally for example you would buy a June contract and sell in August for a $1 credit, thus buying today and selling later at a $1 profit.  On 3 separate occasions, this trader tells me that the spot month has gone to a premium over the future month in the delivery process.  This past February it went as high as a $3.50 premium.

So how could this possibly be?  How could gold have gone to any premium at all?  How or why could it ever be worth more today than in the future?  Does the old "bird in the hand versus two in the bush" come to mind here?  The only way that the delivery month (for gold because it is money rather than a commodity) can trade at a premium is if it gets bid up in price or the future month sold down in price, one or the other and as simple as that.  The delivery month will only get bid to a premium if enough buyers either question the available current supply to deliver or question the availability of future delivery.  There can be no other reason than this, does or will the supply exist for delivery?  Yes I know, it will be said that "short sellers" may have gotten spooked and bid the spot month to cover a position but why would you do this if supply was not a question and could "buy" your gold in a future month for less if you were 100% sure that you were going to get it?

--------------------------------------------------------------------

The above was written after GOFO rates had finally turned positive after a negative run of 29 out of 30 days.  As I wrote then, this should never ever happen for even a single day unless one of two conditions are present.  1. Gold may be very difficult to source and borrowers of gold have a difficult time finding the metal to lease or 2. Owners of gold begin to refuse to lend because they fear not receiving their gold back in the future.  This is very simplified but the bottom line is that a negative lease rate shows "tightness" in the physical market either because too many want to borrow gold or too few are willing to lend it.

Fast forward to this past week and we see the GOFO rates more negative than any time since 2001!  Too many searching for metal?  Too few willing to lend?  I don't have the answer to this but I do know the lease rates are far more difficult to "fudge" than is "price."  What do I mean by this?  "Price" can and is suppressed by the sale of more futures than there is real supply.  The perceived supply is simply "watered down" by posting margin and selling "gold" which does not exist.  Lease rates on the other hand involve actual and real weights of metal.  This "real metal" cannot be faked or substituted by the financial machinations of posted margin.  I am sure someone will point out the concept of "re hypothecation" which certainly does exist and very well may be a reason for the tightness ...the "chain" may have grown too long?  This is a topic for another day.

OK, so the GOFO rates are now more negative than any time in the last 13 years, we saw something else on Thursday and Friday which may also be connected.  As of Thursday, there were only 33 Nov. Gold contracts still open and awaiting the delivery process.  Scotia was served 920 contracts Thursday and another 462 on Friday.  Please understand this was done "interbank" between Scotia by and large as the stopper, and JP Morgan the issuer.  We are talking about 138,200 ounces of gold of which delivery is being demanded ...NOW!  We don't know if it is Scotia who has a desperate need for the metal or one of their clients but we do know it is someone, otherwise these transactions would not have occurred.   

We also know this "need" for gold has been done in a public fashion.  Do you see where I am headed here?  Why would Scotia do this in a fashion where the COMEX has to report it?  Why not source it from the LBMA?  Why not buy shares in GLD and then withdraw the metal?  Why not go to a refiner or a producer privately as a source?  Why do this in a public manner where "conspiratorial knuckleheads" like us can see it?  Could they have done this elsewhere?  Or couldn't they?  As I mentioned before, this has only happened a handful of times that I can remember in the last 20 years but now happened two days in a row, back to back!  Also, whenever this did happen, it was generally during a large delivery month rather than an off month like November ...and with much smaller amounts of gold.  This is highly unusual to say the least. (After scratching my head a little, I can only guess that this came about as a settlement to some sort of OTC derivative trigger?)  

This of course leads me to a question that a 3rd grader might ask, "Daddy, if the price of gold went down because so much of it was sold then why isn't it available?"  I would ask where did it all go?  Why are there ANY signs of stress or tightness when theoretically you should be able to just walk the streets and pick it up like placer gold?  What happened to the 40 tons of gold that was sold a week and a half back at 12:30 in the morning?  Or was this just "paper?"  Of course if you were German you might ask why you could only get 5 tons last year and if you might get a little more this year since it's so "plentiful"?  Oh, I forgot, this is now considered called a "diplomatic snafu" and has nothing to do with supply.

Folks, this is really big news and a huge "tell" as to the state of supply in the gold market.  Just add these two pieces together, negative GOFO rates and notices instantly being served in a very small delivery month... you get a picture of severe supply tightness.  This in no way is compatible with weak pricing!  Something has to give and since "delivery" in the gold market is a major part of the equation, the sale of derivatives will not cut it much longer.  Just as machinery will not run on COMEX diesel futures, Eastern vaults will not be filled with derivative contracts!

The Most Prescient Statement Ever Made

November 17, 2014

Major, major tremors in the global financial system; and ironically, the epicenter of the "Big One" may well be Switzerland. This tiny nation, most famous for its neutrality, is on the front line of the "Gold Wars"; and as we wrote in yesterday's "call to the Swiss," its eight million people have the opportunity to slay the evil banking Empire with just four million or so votes. Then again, the best things often come in small packages; and the worst, too, like, Cyprus - a nation of just one million, which itself caused momentous shock waves. Heck, the lowly Florida Marlins, owned by Darth Vader's sports world equivalent Jeffrey Loria, are about to pay Giancarlo Stanton - following one fantastic season - $325 million permanently shattering the cost structure of professional sports to the detriment of millions of unsuspecting fans. I'll get to the "most prescient statement ever made" momentarily"; but beforehand, want to discuss why my initially planned title was "you can't make this stuff up" - featuring, in our mind, the "peak hubris" of this, the final chapter of history's greatest "emperor has no clothes" story.

In doing so, I must start with the ramblings of St. Louis Fed President James Bullard, who yesterday reversed his stance on delaying QE, following the past month's historic PPT market goosing - in doing so, telling us all we need to know of the Fed's true mandate. That is the explanation of his change of heart is what makes this "foolishness moment" so poignant - in citing "higher inflation expectations" over the past month.

Higher inflation expectations? Really? Is he referring to the fact that since the "Dow Jones Propaganda Average" bottomed on October 15^th - at essentially the second he said a "logical juncture at this point is to delay the end of QE" - the price of oil has collapsed from $81 to $74, whilst gold has plunged from $1,250 to $1,140; silver from $17.50 to $15.00; and the CRB commodity index from 274 to 266, whilst the "dollar index" surged from 84.5 to 88.0? Equity "rally" and all, the benchmark 10-year Treasury yield of 2.32% is essentially at a 17-month low - excluding the October 15^th "liquidity vacuum"; whilst the broad Treasury market price structure suggests inflation expectations have materially declined. Better yet, despite the rigged "consumer confidence" index having risen to a seven-year high yesterday - to a level last seen at the peak of the 2007 bubble, despite collapsing retail sales; "inflation expectations" were reported to have hit a 12-year low. Again, we cannot emphasize enough that the Fed could not care less about the economy, as its sole mandate has become the support of the equity markets that the "1%" dominate - replete with relentless propaganda justifying such "strength."

Meanwhile, amidst Bullard's "higher inflation expectations" hallucinations, the Eurozone reported a whopping 0.2% increase in third quarter GDP - in yet another blatant example of book cooking to report the technical avoidance of "recession." The MSM actually crowed about the "bullishness" of the unexpected increase from 0.1% in the second quarter - but from the other side of its mouth claimed "Eurozone GDP and inflation show why Quantitative Easing is becoming more certain." In other words, Bullard's "increased inflation expectations" were nowhere to be seen in Europe - which reported a miniscule 0.4% annualized CPI increase in October, near multi-decade lows.

Actually, my "favorite" post Euro GDP propaganda pieces were Bloomberg's "German-French rebound helps keep Euro-Area expanding" and CNBC's claim that "investors breathed a sigh of relief" based on such data, highlighting fictional strength in of all places, Greece! Regarding Germany, its GDP expanded by just 0.2% (according to its fudged numbers), whilst France "surged" 0.3%, as its credit rating was downgraded, no less. And as for Greece, perhaps its GDP did in fact rise by a measly 0.7% following a cumulative 23% plunge over the past six years. However, given its near record 26% unemployment rate; imminent sovereign default (yielding surging bond yields and plunging equities); and oh yeah, riots in Athens whilst such "bullish" data was published, we'll take the "under" on 0.7%.

That said, as noted above, I rapidly changed today's focus after watching the morning's dramatic reversal of the precious metals market supposedly due to a Deutschebank report that contrary to recent SNB-led propaganda, the "yesses" have a "narrow but clear lead" of 44% to 39%; and moreover, "there are reasons to believe factors could be favorable for the amendment." We certainly agree that a "yes" vote is wildly bullish for precious metals - which frankly, could permanently destroy the gold Cartel. However, the fact that the reversal occurred at exactly 10:00 AM EST - i.e., "key attack time #1," on a Friday, no less - with this momentous vote just two weeks away, has us believing far bigger "forces" were at play.

Last night, we were treated to yet another vicious paper raid at 12:30 AM EST - the seventh in the past 10 days, right amidst the Japanese lunch break. And for the fifth time since the U.S. Mint suspended Silver Eagle sales due to an historic demand surge, silver prices were utterly attacked, whilst no other markets materially budged. And this, as gold and silver backwardation increased further to its highest level since 2001!

Thus, when prices turned on a dime at exactly 10:00 AM EST, we clearly were intrigued; ultimately, taking silver up more than 4% - and more importantly, gold above the $1,183 "triple bottom" level of the past two years. The 10-year Treasury yield plunged to nearly 2.3%; and of course, the Dow was not allowed to materially decline. However, the day's big story was gold and silver's surge "out of the blue" - which Zero Hedge attributed to a "dollar dump." Really? The dollar index's 0.1% decline from 87.67 to 87.53 is considered a "dump?" Let alone, with the Yen collapsing to a new seven-year low of 116.3/dollar?

War indeed - a word that is creeping into the world's collective financial consciousness as exemplified by one of our most relevant articles to date, the "final currency war" we discussed two years ago. And what better place to segue to our primary topic as the "most prescient statement ever made" may well have emanated from Ferdinand Lips, the late Swiss banker and ardent GATA supporter, who in 2002 wrote "Gold Wars: the Battle against Sound Money, as seen from a Swiss Perspective."

Yesterday, I read this MUST READ article of the history of Switzerland's de facto gold standard, including the evil machinations of SNB bankers to circumvent it. In it, we learn that in 2002, Ferdinand Lips asked...

Is the SNB on New York's leash?", saying that In my opinion, the once strong, proud and independent SNB has been degraded to an 'Off-shore Branch' of the U.S. central bank (the Federal Reserve) and reports directly to Alan Greenspan and his cohorts in New York.

--Zero Hedge, November 14, 2014

Next, he validates what we have been writing of for years; in my case, coinciding exactly with my entry to precious metal investments and commentary in 2002...

It is a given that the Swiss gold sales will help New York money center banks to survive a bit longer. It will help them manipulate the gold market.

--Zero Hedge, November 14, 2014

And last but not least, the "most prescient statement ever made" - again, from the days of yore of 2002...

But, gold's time is still to come. If the SNB does not stop its sales, Switzerland will have to buy back its gold one day but at a higher price.

-Zero Hedge, November 14, 2014

And one more comment, as the Miles Franklin Blog joins the burgeoning global movement to defeat the spawn of evil that are Central bankers on November 30^th. Apparently, the SNB's deputy governor at the turn of the century, when the Franc's gold de-linking coup was executed - Jean-Pierre Roth - inadvertently made comments that could prove the "straw that broke the camel's back" for indecisive Swiss voters. Back then, when the Franc was 40% backed by gold, he argued that a 20% backing was more appropriate, as "20% makes a great deal of sense from a diversification point of view, and meets our constitutional obligation to maintain gold reserves."

Well Jean-Pierre, now that the Franc's gold backing has been reduced to a measly 7%, following the dishoarding of 1,500 tonnes at roughly $350/oz.; and the Franc is down 16% in the three years since the Franc was pegged to the Euro; do you still believe 20% gold backing is a good idea? I know you have benefitted greatly from unprecedented currency debasement, given you sit on the boards of some of Switzerland's largest public corporations, serve as a governor of the IMF, and Chairman of the Bank of International Settlements (is this guy evil, or what!). However, the vast majority have not, which is why Switzerland nearly passed a $25/hour minimum wage referendum earlier this year, care of the massive inflation unleashed due to your policies.

To conclude, no more than 1% of the world realizes the importance of November 30^th today. However, don't be surprised if "the 99%" are well aware shortly thereafter; which is why NOW is the time to protect your assets with precious metals.

Andy Hoffman joins Kerry Lutz of the Financial Survival Network to discuss Obamacare, the Swiss referendum, falling oil prices, collapsing currencies, largest Chinese bad debt increase in a decade, Russia, gold and silver.  To listen to the interview, please click below.  

The views and opinions expressed in this e-mail are solely those of the original authors and other contributors. These views and opinions do not necessarily represent those of Miles Franklin Ltd., the Miles Franklin Ltd. staff, and/or any/all contributors to this site.  

Readers are advised that the material contained herein is solely for informational purposes. The author and publisher of this letter are not qualified financial advisors and are not acting as such in this publication. The Miles Franklin Report is not a registered financial advisory and Miles Franklin, Ltd., a Minnesota corporation, is not a registered financial advisor. Readers should not view this publication as offering personalized legal, tax, accounting, or investment-related advice. All forecasts and recommendations are based on opinion. Markets change direction with consensus beliefs, which may change at any time and without notice. The information and data contained herein were obtained from sources believed to be reliable, but no representation, warranty or guarantee is made that it is complete, accurate, valid or suitable. Further, the author, publisher and Miles Franklin, Ltd. disclaims all warranties, express, implied or statutory, including, but not limited to, implied warranties of merchantability, fitness for a particular purpose, accuracy and non-infringement, and warranties implied from a course of performance or course of dealing. The reader accepts information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Past results are not necessarily indicative of future results. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author, publisher, Miles Franklin, Ltd, and their respective officers, directors, owners, employees and agents are not responsible for errors or omissions or any damages arising from the display or use of such information. The author, publisher, Miles Franklin, Ltd, and their respective officers, directors, owners, employees and agents may or may not have a position in the commodities, securities and/or options relating thereto, and may make purchases and/or sales of these commodities and securities relating thereto from time to time in the open market or otherwise. Authors of articles or special reports contained herein may have been compensated for their services in preparing such articles. Miles Franklin, Ltd. and/or its officers, directors, owners, employees and agents do not receive compensation for information presented on mining shares or any other commodity, security or product described herein. Nothing contained herein constitutes a representation, nor a solicitation for the purchase or sale of commodities or securities and therefore no information, nor opinions expressed, shall be construed as a solicitation to buy or sell any commodities or securities mentioned herein. Investors are advised to obtain the advice of a qualified financial, legal and investment advisor before entering any financial transaction.