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(This
story appeared in the Huffington Post on June 26, 2009.)
http://www.huffingtonpost.com/nathan-lewis/wheres-the-gold_b_216896.html
The
Comex is the name for the largest gold futures market in the world,
traditionally centered in New York City. Although the market recently became
part of the Chicago Mercantile Exchange, it has retained its old nickname.
Also, the depositories which hold the actual bars of gold used to settle the
futures contracts remain in New York City.
A gold
depository must be the most boring business on earth. They charge a small
monthly fee to store 100oz. standardized bars of gold in an insured vault. It
is an industrial-sized version of a safe deposit box.
The
owner of a 100oz. bar owns a specific chunk of gold. It has a manufacturer, a
serial number, and an exact weight measured to the 1/100th of an ounce. A
written depository receipt -- similar to an old-fashioned paper share
certificate -- shows the exact date the bar entered the depository, and the
entire chain of ownership since that date; they often change hands without
leaving the depository. You can request to withdraw the bar from the
depository, and you should receive exactly the bar indicated.
Interest
in precious metals as an investment has been heating up, and some fund
managers have begun to take very large positions. Demand for Comex gold bars
has been increasing -- especially as they are significantly cheaper per ounce
than alternatives like 1oz. bullion coins or the kilogram bars popular in
Europe.
Jim
Sinclair of jsmineset.com, a legendary gold trader, reported that some of his
contacts have told him that, when they request to withdraw their 100oz. bars
from the Comex depositories, they have not received the proper indicted bars.
They received a bar, but not one with the correct serial number or weight.
Why
not? One possibility is that an honest mistake was made. The high demand
recently has apparently kept the depository workers very busy. Wall Street
veterans recall that delivery errors were chronic in the days of paper share
certificates.
Another
possibility is that the bar indicated on the warehouse receipt does not
actually exist. The implications of that are rather dire.
This
would not be so troubling if there were not already a series of very odd
things happening down at the Comex. Delivery delays have been chronic. This
could be a symptom of an overworked staff. Or, it could be a purposeful
stalling tactic. In any case, it should not take weeks and possibly even
months, and sometimes dozen of inquiries, to get the gold you already own out
of the warehouse.
The
Comex itself, however, has been reporting that business at the warehouse is
very slow. The daily reports of warehouse movements show almost nothing
happening, day after day. So which is it, busy or not busy?
As
futures contracts expire, a certain number of holders elect to pay cash to
receive the physical gold. The number of delivery notices has been very high
since autumn of last year. For example, in May, investors requested the
delivery of 20 million ounces of silver, against a dealer inventory of about
64 million ounces. Since then, there has been no record of anywhere near that
amount of silver leaving dealer inventory, being delivered into the
warehouse, entering customer inventory, or leaving the warehouse. Another
17.45 million ounces of silver were requested in March, evidence of which was
nowhere to be seen in the warehouse reports.
In
April, delivery notices were sent on a whopping 1.5 million ounces of gold,
against 2.5 million ounces of dealer inventory. That month, Deutsche Bank
alone delivered 850,000 ounces. This coincided, rather suspiciously, with a
sale of 1.14 million ounces of gold by the European Central Bank that month,
suggesting that Deutsche Bank was being bailed out in a big way. Nothing of
this size turned up in the warehouse reports. Nothing followed similarly
large deliveries in December 2008. By Comex rules, all physical deliveries
must go through the warehouse. What happened? Until investors receive an
explanation from the exchange, which has thus far been silent, we must regard
it as being very suspicious. Very, very suspicious.
What
does it all mean? First, there are indications that the seller side of
futures contracts (such as Deutsche Bank in April) are having a difficult
time making good on their commitments. Second, the information reported by
the Comex regarding physical inflows and outflows is looking more and more
like a convenient fiction. Third, there is some doubt as to whether there is
gold in inventory -- as there absolutely should be -- to match existing
warehouse receipts. Fourth, the Comex warehouse is one of the most secure
forms of gold investment in the world. If they can't be trusted, what does
that say about ETFs, pooled accounts, futures, forwards, options, and all the
other forms of "paper gold" out there? Fifth, if it becomes clearer
that there is no physical supply to meet physical demand, the dollar price of
gold could go much higher.
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
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