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January 01, 2006

The End of the Innocence
by Rob Kirby

As a Canadian, I live in a country whose government [or at least their Central Bank] has divorced itself from sound money. It being a matter of factual historical record [Canada's sovereign gold is gone, kaput - nadda], I can only nowadays wonder why one of Canada's most revered financial Institutions - Bank of Nova Scotia - finds itself embroiled in 'unusual circumstances' at the centre of the gold universe - COMEX?

Appearances Versus Reality

To any untrained [or uninformed] eye, viewing the stockpile data of physical gold 'warehoused' at the NYMEX's COMEX division in NY - admittedly nothing seems to be amiss [ie. warehoused totals don't seem to change much].

But Let's Take A Peak Under The Surface

First, it's highly relevant for readers to understand that stockpiles of COMEX physical precious metals [gold and silver in particular] represent the world's largest store of presumably 'available for trade' physical metal. The maintenance of this "illusory store of metal" is critical because it backstops the COMEX price discovery mechanism. It is also noteworthy that COMEX prices - which purportedly constitutes the 'free markets' in these underlying metals - also validate an overhanging, obscenely perverse inverted pyramid of derivatives.

Now, let's look first at COMEX gold inventory - in a big picture sense - then what's happened to the ownership of COMEX stocks of gold in the month of December 05:

Each 'contract' of COMEX futures is equivalent to 100 troy ounces of gold. In the month of December, 2005 [thus far] 21,105 contracts of gold have been delivered [changed ownership]. This "stunning" total represents 2,110,500 ounces of a total 6.5 million ounces of gold 'housed' at COMEX warehouses!

Of the total above, it is estimated that Scotia Mocatta [a division of Bank of Nova Scotia] has served as the recipient counterparty [stopper] of roughly one half [i] of all this gold. The Canadian Government [or Bank of Canada if you prefer] liquidated their nation's sovereign gold reserve more than 10 years ago and - to date - ostensibly owns none. What is it that the Bank of Nova Scotia knows about gold that has required them [or their customers] taking ownership of approximately 1/6 th of the world's most visible supply of gold in less than one month?

What Gives, Does Anyone Care?

In case anyone does, here's my take on what is really happening:

The "churn" on COMEX - for now - serves as strictly a 'change of ownership' of the physical stockpile. It seems the physical metal ownership is being acquired by some entity [s] in such a way as not to draw attention by significantly drawing down on stockpiles - so it's all optics.

Over the next three months, the U.S. dollar faces an uncertain future owing to likely significant liquidations in favor of the Euro with the establishment of a Petro Euro Oil Bourse - [March 20/06]. This uncertainty could significantly jeopardize the U.S. dollar's standing as the world's reserve currency.

Could it be, that investors who are amassing large stocks of precious metals through Scotia [and others] at COMEX - they intend to withdraw the physical [lock, stock and barrel] in the very near future - and suddenly there will be none? Investors should be aware that some serious accumulation is in fact occurring in the precious metals arena. Could this be foreshadowing another big move in the market?

March 20, 2006 - like it or not - is shaping up to be a date of significance. As this date approaches it will be interesting, indeed, to observe the machinations of COMEX warehouse stocks of metal as well as the fortunes of Iran - geopolitically on the world stage.

[i] On the date of writing, Dec. 28/05 49 gold contracts were delivered - BNS stood for 39 of them. Cumulative data is not published [only daily data reported publicly] on these accounts by NYMEX. To date in Dec. 05 - 21,105 contracts have been delivered [meaning change of ownership] with veteran industry watchers - observers from Bill Murphy's Lemetropolecafe.com estimating that BNS has been 'stopper' for roughly half of all COMEX gold deliveries this month.

Rob Kirby
Kirby Analytics

Copyright © 2004 - 2006 Rob Kirby

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