Serpo
10th June 2015, 03:20 PM
(http://seekingalpha.com/article/3247676-did-comex-just-receive-a-physical-gold-bailout-from-the-feds)
Did COMEX Just Receive A Physical Gold Bailout From The Feds? Jun. 9, 2015 4:34 PM ET | 48 comments (http://seekingalpha.com/article/3247676-did-comex-just-receive-a-physical-gold-bailout-from-the-feds#comments_header) | Includes: C (http://seekingalpha.com/symbol/C), GS (http://seekingalpha.com/symbol/GS), JPM (http://seekingalpha.com/symbol/JPM), MS (http://seekingalpha.com/symbol/MS)
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
On June 1, 2015, JPMorgan added almost exactly enough ounces of physical gold to patch the deficiency between supply and delivery demand at COMEX, avoiding widespread dealer default.
Declassified documents, along with strong circumstantial evidence indicate that it was not JPMorgan, but its most important customer, the US Federal Reserve, that just bailed out COMEX.
The deficit in world physical gold supply will be at least 606.1 tons in 2015, but may be much larger, and similar incidents are likely in the future.
The deficit in world gold supply versus demand will grow much larger in 2016 and beyond.
Even if the entire remaining US gold reserves were mobilized, prices could not be permanently held down to current levels, making gold and gold mining stocks a good deal now.
In an article dated June 1, 2015 (http://seekingalpha.com/article/3227026-gold-market-tightness-puts-comex-clearing-members-on-the-edge-of-default), I pointed out that COMEX clearing members had gotten themselves to the edge of a widespread default on physical gold delivery obligations. They faced net claims of 550,000 troy ounces against only 370,000 registered ounces left at the COMEX warehouses. That left a deficiency of 170,000 ounces, or 5.29 tons of gold.
That same day, JPMorgan Chase (NYSE:JPM (http://seekingalpha.com/symbol/jpm)) transferred 177,402 troy ounces of gold into COMEX registered gold stockpiles (https://www.scribd.com/doc/267908416/06-01-15-COMEX-Gold-Stocks) - just enough to cover the shortfall at maturity, plus some extra to cover the additional buying that always happens during an average delivery month. All this raises a question: Did JPMorgan Chase just engage in a bailout similar to John Pierpont Morgan's 1907 bailout of the New York City banks?
At first glance, it may appear as if JPM bailed out other COMEX clearing members. If you look closer, however, you see something else. The June 2, 2015 delivery report (https://www.scribd.com/doc/267908698/06-01-15-Run-Date-Daily-MetalsIssuesAndStopsReport-3) shows that the gold that saved COMEX came from JPMorgan's house account. Then, after replenishing COMEX registered gold supplies, it delivered 246,800 troy ounces of bank-owned gold, representing 2,468 matured short contracts, as JPMorgan customers purchased and took delivery of 42,200 troy ounces.
The Commodities Futures Trading Commission (CFTC) regulates COMEX. It publishes a monthly report called the "Bank Participation Report," which tells us how much of the open interest, each month, is held by banks and how long or short the banks happen to be. As of May 5, 2015 (http://www.cftc.gov/MarketReports/BankParticipationReports/deamay15f), taken together, all US-based banks, including JPMorgan, Citigroup (NYSE:C (http://seekingalpha.com/symbol/c)), Goldman Sachs (NYSE:GS (http://seekingalpha.com/symbol/gs)), and Morgan Stanley (NYSE:MS (http://seekingalpha.com/symbol/ms)), held a net short position (after subtraction of offsetting long positions) of only 5.8% of the total. A report the next month, dated June 2, 2015 (http://www.cftc.gov/MarketReports/BankParticipationReports/deajun15f), disclosed that all US-based banks had upped their shorts to a net total of 9.2%.
COMEX rules require that deliveries be assigned in proportion to the number of shorts a particular clearing member has open, for itself and its customers, as of the day the futures contracts mature. If the clearing member is delivering on behalf of a client, the gold is listed on the delivery report as having come from the member's "customer account." Even if JPM is engaged in proprietary trading and market-making at COMEX, it is virtually impossible for it to have ended up assigned to almost half of all deliveries. It is even more unlikely that every gold bar in those deliveries was sourced from the bank itself, rather than its customers.
In a previous article (http://seekingalpha.com/article/3227026-gold-market-tightness-puts-comex-clearing-members-on-the-edge-of-default), I wrote:
http://seekingalpha.com/article/3247676-did-comex-just-receive-a-physical-gold-bailout-from-the-feds
Did COMEX Just Receive A Physical Gold Bailout From The Feds? Jun. 9, 2015 4:34 PM ET | 48 comments (http://seekingalpha.com/article/3247676-did-comex-just-receive-a-physical-gold-bailout-from-the-feds#comments_header) | Includes: C (http://seekingalpha.com/symbol/C), GS (http://seekingalpha.com/symbol/GS), JPM (http://seekingalpha.com/symbol/JPM), MS (http://seekingalpha.com/symbol/MS)
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
On June 1, 2015, JPMorgan added almost exactly enough ounces of physical gold to patch the deficiency between supply and delivery demand at COMEX, avoiding widespread dealer default.
Declassified documents, along with strong circumstantial evidence indicate that it was not JPMorgan, but its most important customer, the US Federal Reserve, that just bailed out COMEX.
The deficit in world physical gold supply will be at least 606.1 tons in 2015, but may be much larger, and similar incidents are likely in the future.
The deficit in world gold supply versus demand will grow much larger in 2016 and beyond.
Even if the entire remaining US gold reserves were mobilized, prices could not be permanently held down to current levels, making gold and gold mining stocks a good deal now.
In an article dated June 1, 2015 (http://seekingalpha.com/article/3227026-gold-market-tightness-puts-comex-clearing-members-on-the-edge-of-default), I pointed out that COMEX clearing members had gotten themselves to the edge of a widespread default on physical gold delivery obligations. They faced net claims of 550,000 troy ounces against only 370,000 registered ounces left at the COMEX warehouses. That left a deficiency of 170,000 ounces, or 5.29 tons of gold.
That same day, JPMorgan Chase (NYSE:JPM (http://seekingalpha.com/symbol/jpm)) transferred 177,402 troy ounces of gold into COMEX registered gold stockpiles (https://www.scribd.com/doc/267908416/06-01-15-COMEX-Gold-Stocks) - just enough to cover the shortfall at maturity, plus some extra to cover the additional buying that always happens during an average delivery month. All this raises a question: Did JPMorgan Chase just engage in a bailout similar to John Pierpont Morgan's 1907 bailout of the New York City banks?
At first glance, it may appear as if JPM bailed out other COMEX clearing members. If you look closer, however, you see something else. The June 2, 2015 delivery report (https://www.scribd.com/doc/267908698/06-01-15-Run-Date-Daily-MetalsIssuesAndStopsReport-3) shows that the gold that saved COMEX came from JPMorgan's house account. Then, after replenishing COMEX registered gold supplies, it delivered 246,800 troy ounces of bank-owned gold, representing 2,468 matured short contracts, as JPMorgan customers purchased and took delivery of 42,200 troy ounces.
The Commodities Futures Trading Commission (CFTC) regulates COMEX. It publishes a monthly report called the "Bank Participation Report," which tells us how much of the open interest, each month, is held by banks and how long or short the banks happen to be. As of May 5, 2015 (http://www.cftc.gov/MarketReports/BankParticipationReports/deamay15f), taken together, all US-based banks, including JPMorgan, Citigroup (NYSE:C (http://seekingalpha.com/symbol/c)), Goldman Sachs (NYSE:GS (http://seekingalpha.com/symbol/gs)), and Morgan Stanley (NYSE:MS (http://seekingalpha.com/symbol/ms)), held a net short position (after subtraction of offsetting long positions) of only 5.8% of the total. A report the next month, dated June 2, 2015 (http://www.cftc.gov/MarketReports/BankParticipationReports/deajun15f), disclosed that all US-based banks had upped their shorts to a net total of 9.2%.
COMEX rules require that deliveries be assigned in proportion to the number of shorts a particular clearing member has open, for itself and its customers, as of the day the futures contracts mature. If the clearing member is delivering on behalf of a client, the gold is listed on the delivery report as having come from the member's "customer account." Even if JPM is engaged in proprietary trading and market-making at COMEX, it is virtually impossible for it to have ended up assigned to almost half of all deliveries. It is even more unlikely that every gold bar in those deliveries was sourced from the bank itself, rather than its customers.
In a previous article (http://seekingalpha.com/article/3227026-gold-market-tightness-puts-comex-clearing-members-on-the-edge-of-default), I wrote:
http://seekingalpha.com/article/3247676-did-comex-just-receive-a-physical-gold-bailout-from-the-feds