Gold Price - Where is it heading?

Last Tuesday, the Office of the Comptroller of the Currency (OCC) released its quarterly report on derivatives held at the megabanks on Wall Street. As we browsed through the standard graphs that are included in the quarterly report, one graph jumped out at us. It showed a measured growth in precious metals derivatives at insured U.S. commercial banks and savings associations over the past two decades and then an explosion in growth between the last quarter of 2021 and the end of the first quarter of this year.

In just one quarter, precious metals derivatives had soared from $79.28 billion to $491.87 billion. That’s a 520 percent increase in a span of three months. (See Figure 18 at this link. The last ten years of the graph is shown above.)

Having studied these quarterly reports since the 2008 financial crash, we knew where to head next. We went to the graphs in the OCC report showing the breakdown of different categories of derivatives at specific banks. Table 21 showed that precious metals contracts at JPMorgan Chase had spiked to $330.123 billion as of March 31, 2022. The same table showed that Citigroup’s insured commercial bank, Citibank, held $114.148 billion in precious metals derivatives.

According to the Federal Deposit Insurance Corporation, as of March 31, 2022, there were 4,796 federally insured banks and savings associations in the U.S. Combine that figure with the latest report from the OCC and it means that just two banks, JPMorgan Chase and Citibank, control 90 percent of the precious metals derivatives of all 4,796 insured financial institutions in the U.S.

We checked the previous OCC report for the quarter ending December 31, 2021. It showed that at year-end 2021, JPMorgan Chase had reported only $28.182 billion in precious metals derivatives versus $330.123 billion three months later – a staggering increase of 1,071 percent.

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“Beginning January 1, 2022, the largest banks are required to calculate their derivative exposure amount for regulatory capital purposes using the Standardized Approach for Counterparty Credit Risk (SA-CCR). Under SA-CCR gold derivatives are considered precious metals derivative contracts rather than an exchange rate derivative contract resulting in an increase in reported precious metals derivative contracts compared to prior quarters….”

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The footnote raised more questions than it answered. According to legal definitions available at Cornell Law School (not to mention common sense), an “exchange rate derivative contract” is “a cross-currency interest rate swap, forward foreign-exchange contract, currency option purchased, or any other instrument linked to exchange rates that gives rise to similar counterparty credit risks.”

Why would a gold derivatives contract have ever been classified as an exchange rate contract? Gold contracts are to foreign exchange contracts what zebras are to a centipede.

There is the decided perception that Wall Street megabanks have been hiding from the public the true extent of their involvement in the gold market through some ginned-up derivative definition.

In addition to the wild growth in precious metals exposure at JPMorgan Chase, Citibank’s precious metals holdings in one quarter had grown from $6.979 billion to $114.148 billion. But Bank of America, a peer bank to JPMorgan Chase and Citibank, showed no such gargantuan increase in its precious metals holdings from year-end 2021 to March 31, 2022. The OCC reports that Bank of America held $27.32 billion in precious metals contracts on December 31, 2021 versus $29.441 billion on March 31, 2022. An increase of just 7.76 percent.

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“…knowingly and intentionally placed orders to buy and sell precious metals futures contracts with the intent to cancel those orders before execution (‘Deceptive PM [Precious Metals] Orders’), including in an attempt to profit by deceiving other market participants through false and fraudulent pretenses and representations concerning the existence of genuine supply and demand for precious metals futures contracts. By placing Deceptive PM Orders, the Subject PM Traders intended to inject false and misleading information about the genuine supply and demand for precious metals futures contracts into the markets, and to deceive other participants in those markets into believing something untrue, namely that the visible order book accurately reflected market-based forces of supply and demand. This false and misleading information was intended to, and at times did, trick other market participants, including competitor financial institutions and proprietary traders, into reacting to the apparent change and imbalance in supply and demand by buying and selling precious metals futures contracts at quantities, prices, and times that they otherwise likely would not have traded.”

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mullokintyre said:

At a time when inflation is running high in virtually every country, when fiat currencies are seeing the results of massive increases of money supply, one might expect that PM's would be very much in demand and thus being on a rising curve.
Of course, we have the exact opposite.
There have been numerous articles about just how much of the PM market is gamed by the big banks, the only question has really ever been exactly who are the counterparties.
From Wall Street on Parade

One of the reasons for the massive growth is that for some bizarre reason, the big banks have been allowed to call so many of these derivitive products as exchange derivitive products.
The OCC report had a footnote that explained this large jump.


So for how long has this scam being running?


The Justice department wrote of JPM after its last felony charge

And yet they are allowed to just keep gaming the system.
Open market systems, by the banks , for the banks.
Mick

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ducati916 said:

Mr GG,

This really depends on whether you are talking about paper gold or physical gold. The 2 markets are quite divergent currently.

Paper gold will fall when the markets enter a liquidity event, correlations move to 1. Physical gold premiums, particularly for retail will not fall much, if at all. The issue will be availability...can you actually get physical.

Paper gold will bounce back. If you are fast, you could probably buy near the bottom. The issue is that standing for delivery on the physical is likely to be fruitless.

Why you would want the physical.

At issue is the viability of fiat currencies. The liquidity event in the USD will force the Fed back to QE, pegged interest rates and even higher inflation. That inflation carries a risk of a hyper-inflation if the general population starts to dump dollars. If the USD goes, all fiats go.

At this point the IMF steps in with SDRs. SDRs are simply another fiat. If the SDRs fail to stem the tide of fiat dumping, the only way is to back the currency with gold. I think everyone now realises that cryptos are a non-starter.

Hence China, Russia, Brazil all the 'Stans' and a few others are creating a currency backed by a basket of commodities. This is not a new idea. It was extensively debated in the 1940's/50's. A bit unwieldy.

Individuals need physical gold/silver.

jog on
duc

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DaveTrade said:

When things start to get confusing I like to break things down to hopefully get a clearer view of what is happening, give it the KISS treatment. This first chart shows the support and resistance levels on a monthly chart, the big picture without the noise.

View attachment 143779

Now zoom in to the daily chart and it's clear to see that the trend is down. The next question that needs to be answered is if the downtrend will drive through the monthly support zone or will buyers come in with strength to change the direction of the trend.

View attachment 143780

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Sean K said:

Yes, it does depend on your timeframe.

We've gone up since Jan 16 and we've gone sideways since Jul 20, so looks like a medium term up trend and a short term pause.

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DaveTrade said:

Yes of course the trend that you are looking at matters, this chart shows your monthly trend. We are saying the same thing in that if the monthly support holds and the daily trend reverses then the monthly trend will hold.

View attachment 143784

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(Kitco News) With gold erasing $70 this week while the U.S. dollar surges and crude oil sells off, TD Securities is not ruling a "massive capitulation" event in gold.

The precious metal was trading near 8.5-month lows Wednesday as the U.S. dollar index rose to 20-year highs and crude oil fell below $100. August Comex gold futures were last at $1,737.10, down 1.52% on the day.

"A major capitulation event may be unfolding in gold, just a few days after our put spread expired (a strategist's kryptonite!). We see evidence that the steepest outflows from broad commodity funds since the Covid-19 crisis may be catalyzing a series of cascading liquidations from various speculative groups," said TD Securities senior commodity strategist Daniel Ghali. "This argues for substantial downside for gold in coming sessions as participants are forced to sell in a vacuum."

This trend is being observed across the whole commodities space, as investors exit their long positions amid fears of a potential recession denting future demand.

"A money manager rush for the exits is contributing to the slump in our demand signals, as broad commodity indices are weighed down by massive outflows amid recession fears. The top 15 funds by AUM have posted fund outflows above $1 billion over the past week alone, and are experiencing the steepest outflows since the Covid-19 crisis," Ghali noted. "This highlights that a potential capitulation from this cohort is contributing to the slump in prices for all commodities, which helps to explain the collapse in our real-time commodity demand indicator."

Ghali highlighted copper in particular, noting a sustained downtrend as the metal dropped to 20-month lows Wednesday. "Unless the red metal miraculously trades above $9,750/t by year-end, copper markets are settling into a sustained downtrend to reflect a sharp slowing in commodity demand," he said.

For gold, a drop below $1,800 an ounce and then below the key support of $1,780 an ounce points to "indiscriminate selling by broad commodity funds."

"[The selloff] has likely catalyzed a massive CTA selling program as trend followers respond to deteriorating momentum. This also coincides with coordinated selling from Shanghai's top gold traders as CNY-denominated prices begin to slump," Ghali added.

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bk1 said:

You are looking in the wrong place...

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Captain_Chaza said:

I agree !!
Gold is a hedge against a Falling USD
As you can see in the above chart
The Big Buck is not falling
So who needs Gold?
Not Me!
Give me as many BIG Bucks I can accumulate in these times ,I say

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DaveTrade said:

Yes the US$ is in a strong uptrend, if that trend continues then GLD will most likely break through it's monthly support zone.

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rcw1 said:

Good evening
An interesting article on gold.

U.S. Mint gold bullion sales drop 76% in June year-over-year; silver bullion demand down 69%

Kitco News' general-interest stories takes a look at what is making headlines in the marketplace and how that is impacting precious metals prices

www.kitco.com

Kind regards
rcw1

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ducati916 said:

Interesting article.

So premiums are not falling:

View attachment 143944

Why are premiums not falling? No sellers.

View attachment 143942
I can buy or sell physical. There is obviously a spread. The US futures price is 1740.90

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So the purchase price is not astronomically higher.

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The premium is 4% +/- to buy and a 7% spread if selling.

So I have never really had any major issues buying gold. Pretty much pay and pick it up. Silver however:

View attachment 143943

5 weeks is optimistic. Closer to 8 weeks+

The premium is far higher at 30%. In addition you have that 500oz minimum, which is standard across any silver over here.

View attachment 143947


The physical silver market is tiny from a market cap. viewpoint. If retail becomes interested, supply would be swallowed up in days. The total market cap is +/- $1T. Gold is +/- $11T.

The actual available physical (gold or silver) to buy is a fraction of that, say +/- $16B for silver, possibly far less. It is hard to get accurate figures as JPM and BAC are so heavily involved in the COMEX. Currently SLV which hold unallocated silver on Trust. From memory the Trustee is the NY Bank of Mellon, which is associated with JPM.

View attachment 143948

The circles mark SLV supplying JPM with 12.5 million oz to be used as settlement for those futures contracts that stood for delivery in June.

Currently the paper/physical ratio:

View attachment 143949

It does tend to fluctuate. However the takeaway is that the leverage is very high. High leverage only works in your favour when it works. When it doesn't, markets can move very quickly against you.

Summary:

The point of holding physical is not to trade it. The point is to hold it as an insurance policy against the failure of fiat currencies. Silver is a far more speculative holding as its long term appreciation is a fraction of gold. However, when silver moves, it really moves. On a % basis far more than gold. Currently we sit at +/- 90:1. Historically anything below 30:1 is a good point to exchange your silver to gold or fiat. If you are really aggressive, below 15:1.

Essentially the Central Banks have lost control of their monetary systems as the debt compounds faster than GDP can be grown on a nominal basis (forget on a real basis). This is due worldwide to the level of debt.

Therefore, simple arithmetic provides that Central Banks must continue to expand their Balance Sheets. Currently the US Treasury has the proceeds of the last round of Bond sales in its account. This runs out probably this week or next. There will be more Bond sales to raise cash. If the Fed is the only buyer or majority buyer, then its Balance Sheet will continue to expand, despite ostensibly being in QT.

Every rate hike increases the payments on outstanding debt. Currently interest payments alone exceed tax revenues. Add in indexed Social Security, Medicare, Medicaid, Military spending, government payrolls, etc. and the ponzi scheme is ready to fall.

If the US dollar fails, all fiats fail. Fiats are based on trust, faith and force. Once you lose trust and faith, no amount of force will suffice.

This is why holders of physical are not selling.

All markets are manipulated in the short term. Longer term, reality always wins.

jog on
duc

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