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London's LBMA and New York's COMEX Gold Markets In Collapse

That title is a strong statement to make. Indeed.

However, as discussed in 2014 and again in January of this year, with daily gross trading turnover at the LBMA (London Bullion Market Association) in January of ~ 200M oz. of gold per day, it was inevitable the world's pre-eminent physical gold and silver pricing platform in London would fail due to Gresham's Law and we can now see from available information that it is collapsing.

Gresham's Law predicts that the introduction of debased (or 'bad') money will drive more valuable (or 'good') money out of circulation leaving only the debased, and ultimately worthless, money or claims circulating.

Many will chuckle at the proposition of Western gold market failure and note that the price of gold has gone nowhere. If the markets are in collapse due to lack of available of gold, then where is the price action exploding to the upside? Well, digital gold and silver are still available in copious (infinite) amounts and continue to trade on both the LBMA and COMEX exchanges - you can have as much digital or virtual metal as you want on these digital exchanges. There is no shortage of virtual metal and thus the virtual price that most investors follow won't move up. The bullion banks have always sold-down this virtual gold price when it has risen.

The telling of the story is instead in physical metal availability and so we look first to the LBMA - the primary global 'physical' exchange. The LBMA indicates in it owns market guide that its primary gold trading contracts, unallocated spot market contracts which are claims for spot physical gold (ownership right-here, right-now), give the holder just an unsecured claim for physical gold. This has allowed the creation and trading of non-existent gold to the point that the London spot physical gold market trades 200% of the global annual gold mine production of gold - each day.

Looking to the availability of vault gold in the physical market in London (with a special acknowledgement to the important research by Ronan Manly and Koos Jansen of BullionStar.com), we can see below that outside of the holdings of the Bank of England (official sector holdings) and ETFs and other funds in London, there are approximately 6 tonnes of privately-held gold potentially available to the spot market. It may be argued that the official sector holdings held by the BofE or gold from Switzerland can be made available to market by leasing but the 6 tonnes of Privately Vaulted gold in the graphic below tells another story.

The 'Unaccounted' Privately Vaulted gold (gold potentially available in size to the spot market) has declined from 1,651 tonnes in 2011 to 6 tonnes this year. During this period, physical gold has been predominantly moving rapidly to the East where it has been bought by Asian buyers.

To meet the market requirements in Asia, Western gold has been refined in Switzerland into 99.99% pure kilo bars from Western 'London good delivery' bar format. The gold vaulted in London would be logistically more difficult and costly to move to refineries in Switzerland so we can therefore infer that this gold would be the last available gold to be refined in Switzerland and sent on to Asia. The consumption of these London stockpiles tells us now that the readily available Western gold is gone. Sure, smaller amounts of leased gold can be made available from central banks or surreptitiously from the ETFs and other funds to the market but the rapid decline of London's gold vault holdings tells us that there has already been a landslide in the London gold market.

To give a sense of scale of this event we can estimate the open interest of spot claims by using a 2x to 3x multiplier of the daily gross turnover as exists in other physical materials (commodities). For ease of calculation, if we use the 200M oz daily turnover of January 2015, that translates to an open interest of 400M to 600M oz or ~ 13,000 tonnes to 19,000 tonnes of gold. That's versus 6 tonnes of Privately Vaulted physical gold in London outside of the BoE and the various gold funds.

Vaulted Gold in London
Larger Image

Chart courtesy of ShareLynx

The New York COMEX gold market tells a similar story. The ratio of open interest contract claims on gold vs. registered vaulted physical gold available to settle trades in NY COMEX warehouses has increased now to a 300:1 ratio. Even on this non-physical exchange with numerous escape clauses in the COMEX Rulebook to allow cash settlement, the gold has virtually disappeared with only 150,000 ounces remaining in the registered accounts available for delivery against the 300x larger open interest claims in this market.

COMEX Wharehouse - Registered Gold Stocks Cover

John Exter, who was a former Federal Reserve official, called gold 'power money' or the ultimate form of debt settlement as gold stands alone as nobody else's promise (compare our debt-based fiat money system where all money starts its life as debt). Because of gold's integrity as money and as an asset it has always existed as an unappreciated indicator of the unsoundness of central bank monetary profligacy and government fiscal deficit policy. The suppression of the gold price by pricing physical gold with the exchange of virtual gold will reach its limit with lock-up of the London and New York gold (and silver, platinum and palladium) exchanges when the metal completely disappears.

Savers and investors will then move to other real goods to secure their wealth as this age of fractional reserve trading and central bank monetary sophistry ends - a story of fiat money failure that been repeated over the last 300 years in the West. A monetary and bond market crisis will signal citizens calling the government and central bankers' bluff, once again.

Over the past few days, the London 1-week GOFO rate (LIBOR minus the gold lease rate) has suddenly surged to - 0.30% and the 1-month rate to -0.23% both from positive values signalling physical market stress. We will know whether this is meaningful with time, however the broad story has already been told - the gold is, in broad terms, gone from London and New York.

A final note: We've seen NATO, Russia, China and Iran become much more active militarily and geopolitically over the last 24 months. Are they getting ready for the next phase which is a Western financial crisis and then military conflict (as historically favoured by politicians to deflect attention from the crises they've created) instead of reforming the system? It looks like it from this vantage point.

 

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