Author: Jim Sinclair
Dear CIGAs,
1. When will Comex paper gold no longer be able to manipulate the price of gold as they did today and most every day for the last many years?
2. Can the Comex paper gold exchange default?
I wrote the following Sunday to prepare you for the answers to what appears to be the two most pressing questions today.
It is being re-posted now so you can caste my answers against the mechanics of the process outlined below as number 1 through 14.
I prefer to respond to questions with background knowledge first and then answers second in crisp form, not boring professorial essay work.
The Comex will no longer be able to manipulate price as Asia recognizes the dangers inherent in financial institutions and are therefore channelling their business into the cash bullion market. The Asian demand in the cash market then will not be of the kind that runs away from paper supply, but rather one that stands still and takes it. Should there be a shortfall of gold in the bullion market, delivery will be taken out of the COMEX warehouse to make cash bullion deliveries.
You witnessed this to some degree when gold last came up from the high $740s to $933 in a practically straight line. The paper traders could not hedge long in the bullion market because it simply was not there in size.
The supply in the Comex warehouse appears to total 5,864,965 ounces. Multiply this by $800 gold and you have approximately $4.7 billion. In today's 1.144 quadrillion USD plus derivative market, 4.7 billion is a trivial amount. Compare that to recent failure numbers of the Bailout Bill at $700 billion.
As a very conservative comparison, the US dollar market turnover is above one trillion dollars per day.
The Comex does its $20 thing but at that same instant bullion is down only $10 because the buyers are serious and want significant supply. Those that trade between exchanges for differential profit, as Guy Weiser Pratte’s Dad did in true arbitrage, will instantly bring the paper gold up to the bullion bid or thereabouts.
Once this starts the paper gang is out of aces in running the price of gold. It happened in the 70s and will happen again soon.
That soon can be defined as when the Asian professional public recognizes all these rescue attempts are nothing but white wash applied to the crumbling pile of credit crap.
Default is a definitive term dealing with the inability of one party to perform on a contract. The exchange provides a place for other to agree to contracts, not the exchange. Yes members may be both buyer and seller creating a contract, but the exchange never is.
It is certainly probable that large leveraged interests both long and short could fail on a massive position, as might Lehman when it took Chapter 11.
The guarantee on a contract is first through the clearinghouse that pays out to winners every afternoon and demands the loser then pay into the clearinghouse.
As such, a default or failure to pay in as required by the contract could happen at any time in any size.
The next guarantor of the position to the other capable side is the entire asset of the exchange. The final guarantee is all the assets of all the members. This is something like Lloyd’s of London used to be on insurance.
The loss that has to be guaranteed is the difference between yesterday and today as the position was good yesterday having no problem at the close of the exchange hours. If it were not so the problem would have exploded at the clearinghouse last night.
The only way the Comex can default is if they cannot deliver gold from their warehouse in the kind and means of the 100 oz. contract that fits the legal terms of default.
That would leave the exchange and its member short by default. The guarantee would be all the assets of the exchange and of the membership. I believe the clearinghouse is out of that situation yet that most likely would be determined by litigation as plaintiffs dive at deep pockets.
This was what blew silver through $30 to a $54 bid – none offered. It was universally believed that the Hunts were going to demand delivery on all of their silver, and that long position was supposed to be in excess of Comex warehouse supply. For your information, they had no such intention. Believe me, I know better than anyone on that subject.
In summary both questions are answered by watching the settlement months to determine if the delivery of warehouse gold is on the increase.
This definitively ends the paper gold rein of glory.
It might put a bunker and Herbert touch on the gold market. It would take Weimar to some degree to empty the Comex warehouse, but Weimar to some degree is going to happen.
For your information:
Gold will trade at $1200 and $1650. The USDX will trade at .72, .62 and .52.
1. It is axiomatic that the most leveraged gold market most often (95 percent of the time) sets the price of any cash market. First derivatives (listed futures) commands price.
2. This remains true as long as the COMEX warehouse of gold is NOT meaningfully depleted by long gold contracts by taking delivery from the exchange warehouse.
3. As long as an exchange maintains a warehouse that historically overwhelms historical demand for delivery the first derivative, The COMEX listed gold future, will be the primary cause of price.
4. Taking delivery from the COMEX warehouse is not an easy process as the system is designed not to violate your contract but to be a world-class pain in the ass.
5. The COMEX requires re-assays, assuming you wish to re-deliver. This then places another raving pain in the ass in your way.
6. The COMEX market is effectively an international 24-hour market as there is no location where you cannot buy or sell a COMEX clone.
7. Cash bullion gold as opposed to the semi cash markets that non-USA banks trade is the only totally private means of buying and selling gold.
8. As currency problems increase, first the knowledgeable public such as you clean out the coin market.
9. This is the first time that the international coin markets have been cleaned out everywhere. This did not happen globally in the 70s.
10. Large gold bars are still available in major markets but the backup inventory is getting low.
11. As long as the COMEX warehouse remains adequate and large bars still are available, the paper market, the leveraged COMEX market, will rule the price.
12. Only with a decline in COMEX warehouse inventories and a run down in large bar supplies of the cash market will the cash bullion market command the price of the COMEX futures market.
13. It was not the buying by the Hunts that caused silver to move above $30 into the $50 area, but rather the universal belief that they would take delivery, which would deplete or exceeded the COMEX warehouse supply.
14. The War between paper gold and bullion gold is a war to determine which will take command of the price of gold, nothing more, and nothing less. There will be no two markets trading at different prices. All this battle is about is IF the bullion gold market is going to take the lead in making the singular price away from the traditional axiom that the most leveraged market makes the price. I believe the bullion, in these most unique conditions, will command the one gold price making it hard to impossible to manipulate the gold price via the paper gold market, as is the practice every day.
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