Paper gold becoming irrelevant

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Paper gold becoming irrelevant

Postby Pixel8r » Fri Aug 23, 2013 9:26 pm » Safari 6.0.5 Safari 6.0.5  Mac OS X Mac OS X  Screen Resolution: 1680 x 1050 1680 x 1050

 ! Pixel8r wrote:
This thread has been transferred from the admin forum where warpig & I where chatting . I have transferred it to the main forum in case anyone else is interested.


A while back we had a bit of a long discussion about how I thought the leveraged paper gold market would become irrelevant as they had less access to physical metal.

I noticed this blog post today on Jesse's Cafe - http://jessescrossroadscafe.blogspot.co ... ts_23.html

He finished the post saying;

Next week is an option expiration on the COMEX. I have not followed the balance of puts and calls, because while it is still important in the short run, the paper game is quickly losing traction, as the leverage increases, and the actual pile of bullion at their disposal becomes smaller and less relevant.

So lets see how it goes. Hope to see you Sunday evening, with a possible talk, or interlude of music, in between.


That kind of puts the point I was trying to make better than I did, is what I was saying starting to make any sense yet?
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Re: Paper gold becoming irrelevant

Postby warpig » Sun Aug 25, 2013 11:30 pm » Google Chrome 28.0.150 Google Chrome 28.0.150  Windows Seven Windows Seven  Screen Resolution: 1680 x 1050 1680 x 1050

I understood what you meant, I just disagreed the exchange would let their inventory fall to zero. Was there something beyond this that you thought I didn't quote follow?
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Re: Paper gold becoming irrelevant

Postby Pixel8r » Mon Aug 26, 2013 9:13 am » Safari 6.0.5 Safari 6.0.5  Mac OS X Mac OS X  Screen Resolution: 1680 x 1050 1680 x 1050

warpig » Mon Aug 26, 2013 12:30 am wrote:I understood what you meant, I just disagreed the exchange would let their inventory fall to zero. Was there something beyond this that you thought I didn't quote follow?


I have never thought that the comex would have no metal at all but the point I was trying to make was that as they had less availability of physical metal they would become an irrelevance in the setting the price of gold and silver. In the conversation we had you didn't seem to understand how the comex paper players would not be able to control the price the way they have in the past, I argued that as they had access to less physical they would become irrelevant, you argued that they would just move to a cash only market and would still affect the price of gold.

The main point that I think you didn't get is that the futures market has to fit purpose or it becomes irrelevant. There are plenty of paper only markets already, like spread bets and paper ETFs, but they don't help to set the price of physical metal. The futures market does currently because a contract can be collected for delivery of physical metal. As the dealers on the comex have less physical metal the effect their leverage will have on the price of gold will dwindle. If it ever becomes a cash only market, it will basically become completely irrelevant have no effect at all on the setting of the price of physical metal.

I found it interesting that another commentator was starting to use the word irrelevant to describe the way the paper traders will end up being. :D
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Re: Paper gold becoming irrelevant

Postby warpig » Mon Aug 26, 2013 9:34 pm » Google Chrome 28.0.150 Google Chrome 28.0.150  Windows Seven Windows Seven  Screen Resolution: 1680 x 1050 1680 x 1050

In terms of the following quote, you seem to suggest there is a direct relationship between physical metal and paper by proxy of leverage. This is the bit I don't agree with or perhaps don't at least understand. I've heard this said quite a lot, but it's never explained. Why would the total futures market diminish in size because physical supply is limited? They don't retain a fixed number of physical ounces depending on how many paper contracts are in existence. That ratio could fluctuate wildly unless I misunderstand how the system works. In addition to this, I think they'll make it easier for the warehouses to refuse delivery and create more incentives for cash settlement, i.e. higher premiums. In addition, if the rules are working against TPTB and for the gold bugs, they will be changed and possibly retrospectively.

Does that answer your question? If not perhaps you could explain why paper gold is a `fixed` leverage on physical gold.

Pixel8r » 26 Aug 2013 09:13 wrote:
As the dealers on the comex have less physical metal the effect their leverage will have on the price of gold will dwindle.
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Re: Paper gold becoming irrelevant

Postby Pixel8r » Mon Sep 16, 2013 10:43 am » Safari 6.0.5 Safari 6.0.5  Mac OS X Mac OS X  Screen Resolution: 1920 x 1200 1920 x 1200

warpig » Mon Aug 26, 2013 10:34 pm wrote:In terms of the following quote, you seem to suggest there is a direct relationship between physical metal and paper by proxy of leverage. This is the bit I don't agree with or perhaps don't at least understand. I've heard this said quite a lot, but it's never explained. Why would the total futures market diminish in size because physical supply is limited? They don't retain a fixed number of physical ounces depending on how many paper contracts are in existence. That ratio could fluctuate wildly unless I misunderstand how the system works. In addition to this, I think they'll make it easier for the warehouses to refuse delivery and create more incentives for cash settlement, i.e. higher premiums. In addition, if the rules are working against TPTB and for the gold bugs, they will be changed and possibly retrospectively.

Does that answer your question? If not perhaps you could explain why paper gold is a `fixed` leverage on physical gold.

Because the purpose of a futures market is to provide the ability to producers of gold to forward sell their production and for buyers to purchase it. Speculating traders on this market are a byproduct not the reason for it's existence. The less physical gold that is available means that the futures market is becoming more irrelevant in it's ability to set the price of gold. If the bullion banks on the futures market cannot supply physical metal it becomes purely a paper market, meaning bets get settled in cash only. That also means that the futures market no longer has anything to do with the real price that physical gold is available at.

Ask yourself the question the other way around, why would a futures market that is paper only have any relation to setting the price of gold? The answer is it wouldn't as it isn't a futures market but is purely a paper bet, like a spread bet. So the less physical metal in the futures market the less leverage it has on setting the price of physical gold.

Once people realise that the bullion banks selling futures contracts cannot actually provide the metal the system breaks.

You are right in saying they don't keep a fixed amount and the levels do fluctuate wildly. We are getting close to the point that the market will break, like it almost did in 1999 when Brown had to bail out the bullion banks by selling Britons gold at rock bottom prices. This article I posted from Jesse's cafe recently in the gold thread shows that the number of claims per ounce is now at its highest ever level, higher than 1999. Now that the central banks are buying increasing amounts of gold each year the metal will not be found to save the market this time, as I believe the western central banks actually don't have the metal either, rather an IOU from the bullion banks that need bailing out with physical metal.

COMEX Deliverable Gold Bullion Plunged By 78% in 2013 - Claim Per Ounce Highest On Record

by Jesse - Le Cafe Americain

The last time that the claims per ounce were nearly this high, the central banks had to intervene to keep the bullion banks and exchanges from failing, marked by a period of coordinated selling known as the notorious Brown's Bottom.

    "We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it."

    Sir Eddie George, Bank of England, reportedly in private conversation, September 1999
The first chart below shows that rather nicely.

It is worse today...


Image
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Re: Paper gold becoming irrelevant

Postby warpig » Mon Sep 16, 2013 11:25 am » Google Chrome 28.0.150 Google Chrome 28.0.150  Windows Seven Windows Seven  Screen Resolution: 1680 x 1050 1680 x 1050

No worries. OK the bit I think we probably disagree on is:

1) I don't believe inventory will go low enough to signify, the future's market is insignificant in setting the price. They will retain a certain percentage and then cash settle anything beyond this. To assume they'll let it fail doesn't ring true for me. They'll game the delivery system, the same as they game every other market. They'll change the contract or even the law if necessary. They will maintain the perception their warehouses aren't deplet[ed|ing] and settle quietly in cash. The only way they can preserve the dollar is by gaming gold and they won't break one of their most effective tools.

2) I don't believe the lack of physical in their warehouses is proportional to the amount of "leverage" the futures market has on setting the price. i.e. If inventory is 50% of today's warehouse figures, then the futures market is 50% less effective at setting the spot price. If inventory levels really could dislodge the [COMEX|LBMA] from price discovery, it would be an either it does set the price or it doesn't. I might be reading in between the lines too much here, but the situation you seem to describe sounds like a linear event and I see it more of a boolean event, either [True|False].

So... the way I see it is: If they won't let inventory fall to zero then the COMEX and LBMA will still set the spot price, irrespective of how unjust that might seem. I think the straw that will break the back of gold's price discovery is if inventory goes to zero and they just won't let that happen, because they know that's when the game is up.

What do you think?
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Re: Paper gold becoming irrelevant

Postby Pixel8r » Mon Sep 16, 2013 12:55 pm » Safari 6.0.5 Safari 6.0.5  Mac OS X Mac OS X  Screen Resolution: 1920 x 1200 1920 x 1200

1) The problem for them is that they are also gaming the system between each other, like wolves they turn on each other when they can smell blood. You seem to think they are all in some club together where they game the rest of the world, I think they will turn on each other at any chance to make a dollar. I don't think they will be able to maintain a level of physical in the market once it falls below a certain level the race will be on to get physical, the game will known to be up. Why do you think Brown sold Britons gold in 1999, it was to protect the game from breaking. We are reaching the point when there is no gold left to stop it from breaking IMO.

2) I don't think it is a linear relationship either, agree it is more of a boolean one. The relationship is there though the less physical they have access to the less they can control the price, there comes a point when they have to let the price go in the hope to entice sellers back into the market. But if that happens while the fiat currency systems are being printed to oblivion will the be many sellers? Bullion has been moving from weak hands to stronger hands as people start to realise that the financial system is completely broken.

The LBMA is a physical market it cannot move to cash settlement without the price of physical gold going to the moon, there is no way that it quietly could be transferred to cash only settlement. Can you imagine buyers being quiet about not getting delivery of a contract via the LBMA and just been given their cash back?

You say "they" won't let the stock drop below a certain level, but you have to ask your self where the physical metal is going to come from? Central banks where net sellers for almost 3 decades which was making up the supply deficit. For the last 5 years they have been net buyers, who is going to make up the supply deficit now? The system is crumbling everywhere, they have been trying every trick in the book to control the price of gold and it has ended up with them just having IOU's and the physical supply being transferred east (weak hands to strong).
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Re: Paper gold becoming irrelevant

Postby Acton Boy » Mon Sep 16, 2013 9:26 pm » Safari Mobile 6.0 Safari Mobile 6.0  iPad iPad  Screen Resolution: 768 x 1024 768 x 1024

This is a interesting debate.

So you get to the point where you realise that the counter party to your bet is a 'straw man' who can't or won't divi up with the metal as promised.

BUT your counter party does or will have access to the limitless paper currency printing and will happily pay up the 'backwardation' (bribe).

Would this only work as long as you believe in paper currency ?

What came first the chicken or the egg ?
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Re: Paper gold becoming irrelevant

Postby Pixel8r » Mon Sep 16, 2013 10:48 pm » Safari 6.0.5 Safari 6.0.5  Mac OS X Mac OS X  Screen Resolution: 1680 x 1050 1680 x 1050

Acton Boy » Mon Sep 16, 2013 10:26 pm wrote:Would this only work as long as you believe in paper currency ?

What came first the chicken or the egg ?

That's exactly my point once people start to realise the game is up being paid extra printed fiat in exchange for gold just won't do, especially as the fiat is starting to rapidly depreciate from all the printing. The more paper gold that gets settled for cash the higher the real price of gold goes.

The advantage of gold that it holds over all other forms of money is that it can't be printed, the reason that leveraged paper gold markets without access to the metal becomes less and less effective.
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Re: Paper gold becoming irrelevant

Postby warpig » Mon Sep 16, 2013 11:41 pm » Google Chrome 28.0.150 Google Chrome 28.0.150  Windows Seven Windows Seven  Screen Resolution: 1680 x 1050 1680 x 1050

The LBMA doesn't have to be a physical market, they could change that if they wanted. As I recall, the COMEX cash settlement clause is a fairly recent addition.

Now the miners have been knocked back into oblivion, there's rumours they're selling forward their production again. Whether that's enough ultimately depends on demand.

I suppose the part of this transformation that I'm struggling to visualise, is what event triggers it? I don't think a slow decline will push the fractional system over the edge, it's going to take a whollop IMO. Do we have to wait for a currency event or is there something else that could cause it?

Pixel8r » 16 Sep 2013 12:55 wrote:The LBMA is a physical market it cannot move to cash settlement without the price of physical gold going to the moon, there is no way that it quietly could be transferred to cash only settlement. Can you imagine buyers being quiet about not getting delivery of a contract via the LBMA and just been given their cash back?

You say "they" won't let the stock drop below a certain level, but you have to ask your self where the physical metal is going to come from? Central banks where net sellers for almost 3 decades which was making up the supply deficit. For the last 5 years they have been net buyers, who is going to make up the supply deficit now? The system is crumbling everywhere, they have been trying every trick in the book to control the price of gold and it has ended up with them just having IOU's and the physical supply being transferred east (weak hands to strong).
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Re: Paper gold becoming irrelevant

Postby Pixel8r » Tue Sep 17, 2013 7:47 pm » Safari 6.0.5 Safari 6.0.5  Mac OS X Mac OS X  Screen Resolution: 1680 x 1050 1680 x 1050

As if by magic a relevant blog post on KWN today backing up my thoughts;

Here’s Why There Is A War In Gold Near The Key $1,300 Level

...While Gold Open Interest contracts have declined -10.2% so far in 2013, this has been surpassed by a drop of -71% in registered (deliverable) gold at the COMEX. As it stands today, there are nearly 58 claims per ounce of deliverable gold. Put another way, the COMEX would have to come up with nearly 38 million ounces ($50 billion) of gold to meet these contracts. As it stands today, someone could come in and buy all current (deliverable) COMEX gold inventory for $880 million. The end game is that the COMEX will resort to settling contracts in cash, and the ‘paper’ gold market will effectively go away...with much higher gold prices following thereafter...
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Re: Paper gold becoming irrelevant

Postby warpig » Tue Sep 17, 2013 8:04 pm » Google Chrome 28.0.150 Google Chrome 28.0.150  Windows Seven Windows Seven  Screen Resolution: 1680 x 1050 1680 x 1050

They won't let someone come in and request delivery of $880 million worth of gold though, so it won't happen IMO.
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Re: Paper gold becoming irrelevant

Postby warpig » Tue Sep 17, 2013 10:00 pm » Google Chrome 28.0.150 Google Chrome 28.0.150  Windows Seven Windows Seven  Screen Resolution: 1680 x 1050 1680 x 1050

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Re: Paper gold becoming irrelevant

Postby Pixel8r » Tue Sep 17, 2013 10:06 pm » Safari 6.0.5 Safari 6.0.5  Mac OS X Mac OS X  Screen Resolution: 1680 x 1050 1680 x 1050

warpig » Tue Sep 17, 2013 9:04 pm wrote:They won't let someone come in and request delivery of $880 million worth of gold though, so it won't happen IMO.

So they will settle in cash which means the market becomes irrelevant, without settling in metal the market starts to become pointless in that it isn't a market more a bookies.
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Re: Paper gold becoming irrelevant

Postby Pixel8r » Tue Sep 17, 2013 10:08 pm » Safari 6.0.5 Safari 6.0.5  Mac OS X Mac OS X  Screen Resolution: 1680 x 1050 1680 x 1050


The lower that goes the more it makes my point. What level do you think they will make it cash only settlement? I guess it isn't that important really as the LBMA is the real physical metal market.
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Re: Paper gold becoming irrelevant

Postby warpig » Tue Sep 17, 2013 10:25 pm » Google Chrome 28.0.150 Google Chrome 28.0.150  Windows Seven Windows Seven  Screen Resolution: 1680 x 1050 1680 x 1050

I still can't imagine it happening.

Pixel8r » 17 Sep 2013 22:06 wrote:without settling in metal the market starts to become pointless
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Re: Paper gold becoming irrelevant

Postby Pixel8r » Tue Sep 17, 2013 10:31 pm » Safari 6.0.5 Safari 6.0.5  Mac OS X Mac OS X  Screen Resolution: 1680 x 1050 1680 x 1050

warpig » Tue Sep 17, 2013 11:25 pm wrote:I still can't imagine it happening.

A futures market that only settles in cash, as you suggest, would have no bearing on the physical price of metal as they can't supply it. Do you think a spreadbet on gold has any effect on the price of the physical metal?

It is only in the ability to supply metal that the market has an effect on the price, without that it disconnects from price setting.
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Re: Paper gold becoming irrelevant

Postby warpig » Tue Sep 17, 2013 10:51 pm » Google Chrome 28.0.150 Google Chrome 28.0.150  Windows Seven Windows Seven  Screen Resolution: 1680 x 1050 1680 x 1050

I never said it would only settle in cash, only it would settle in cash once inventory reached a certain limit. It would still be supplied, it's just volumes would be low. I'll bet you a fiver the LBMA never runs out of metal.

Pixel8r » 17 Sep 2013 22:31 wrote:A futures market that only settles in cash, as you suggest, would have no bearing on the physical price of metal as they can't supply it. Do you think a spreadbet on gold has any effect on the price of the physical metal?

It is only in the ability to supply metal that the market has an effect on the price, without that it disconnects from price setting.
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Re: Paper gold becoming irrelevant

Postby Pixel8r » Sun Sep 22, 2013 10:23 am » Safari 6.0.5 Safari 6.0.5  Mac OS X Mac OS X  Screen Resolution: 1680 x 1050 1680 x 1050

Most of the PM commentators are disheartened with this latest paper short sale after the fed announced no taper on Wednesday. Personally I think this latest smackdown is showing exactly how precarious the situation is for fiat currencies, which makes me happier with the decisions I have made.

Each time they are forced to defend the currencies by selling paper gold all it does is bring forward the day when there will be no physical gold left anywhere. Cheaper prices mean an increase in demand, cheaper prices means a decrease in supply from the mines, the only thing increasing is paper promises.

I have noticed that there appears to be a split going on currently in the cartel, it used to be the BIS, central banks and bullion banks working in unison, but we have more central bank buying than selling it and the bullion banks are moving massively long. How has this latest smack-down been accomplished? BIS naked short?

The availability of physical supply is the achilles heel of the cartel and as they have less access to it the paper sales become more irrelevant. This latest paper sale with prove to be ineffective this following week IMO and the price will rise even though they have sold tonnes more paper promises. I see that each paper sale does effect the price short term but the time taken recover also decreases and we are approaching the zero hour where paper sales become almost totally ineffectual.
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