Is This the End of COMEX Paper Gold?

Is This the End of COMEX Paper Gold? Author: Tom Luongo for Gold, Goats and Guns

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There’s been a lot of speculation in the Gold community about what’s happening in the market this year. 2020 has been wracked with unprecedented gyrations in the gold market.

It’s also seen gold finally breach the $2000 level and, this week after a nasty correction, is still holding onto most of its recent gains.

This rally in gold and the persistent supply tightness which has kept gold futures in contango for most of the year are indicators that something has fundamentally shifted in the gold market.

And now, the question on a lot of people’s minds is whether we’ll see the end of the fiction of the paper gold market as epitomized by the futures market on the COMEX.

Alistair Macleod’s recent article detailed the gyrations of the gold futures market explains why he felt the so-called bullion banks who work with the central banks to keep gold control have, in fact, lost control.

His detailed the use of open interest on the COMEX to push and pull the price of gold and how the market changed after March 23rd when the futures premiums blew out to a high of $70 over the cash price in the forex markets.

Screen Shot 2020 08 06 at 11.25.08 AMUsing mass liquidation to crater the price of gold and force thinly-margined, weak longs off their positions is a classic COMEX raid on the gold and silver markets.

And if you look closely at this chart you’ll see a few moments where dramatic drops in open interest didn’t result in big price drops. So, either longs ponied up the cash to stay in their positions or the buying into those ‘raids’ so intense that attempt failed to break the psychology of the gold market.

This is especially true at the end of July, where the attempts to crash the price saw the contango premium contract sharply to force longs into unprofitable positions just before the delivery period opened up to try and get them to settle up in cash rather than stand for delivery.

Zerohedge has been all over this story of record gold deliveries to the COMEX in recent months.

An important change in the global gold market occurred on March 23, 2020. On that day the price of gold futures in New York started drifting higher than the price for spot gold in London. Ever since, the spread has persisted, though it continuously widens and narrows. The reason for this disturbance in the market can be read in my previous article “What Caused the New York vs. London Gold Price Spread and Why it Persists.”

For years folks have talked about that ultimate dramatic moment where the COMEX stands naked in front of the gold community unable to source the physical metal and defaulting on its obligations.

We saw the opposite version of that in oil earlier this year when the May contract closed at $-40.57 per barrel because there was no place to send the oil the contracts represented.

There was so much open interest which needed to settle that the speculators couldn’t resolve the positions without paying through the nose to find a place to put the oil they’d just bought.

And a lot of people feel the same thing will happen in gold in reverse. In this scenario there won’t be enough gold to deliver to those who want the metal. Normally, gold futures are settled in cash.

It’s not a producer/consumer hedging platform. It’s a currency hedging/speculator platform.

But in 2020 it’s now a source of physical gold supply for someone and the COMEX isn’t happy about it at all.

The latest raid on gold began on Friday and continued through Tuesday. When all was said and done more than $200 got knocked off the price, peak to trough.

It should have been enough to dampen gold bull enthusiasm given the strength of the rally off the March low. And during the worst of the raid gold moved back into backwardation.

But once the raid was over and a new low established gold moved right back into contango and with that an explosion off the low and a move right back to challenge $2000 again on Thursday.

What’s even more impressive is that the COMEX, after Monday’s follow-through beat down, did what it always does to protect itself, it raised margin requirements on both gold and silver to force even more liquidations from now exposed and under-water longs.

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