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Bullion Banks Covering Their Shorts: Time To Buy Gold!

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EDITOR'S NOTE: The decoupling of the physical market and the paper market presents some very unique opportunities for savvy investors. As noted previously in our emails, part of the CARE ACT affords some very interesting opportunities to take withdrawals from your IRA/401K  and repay those without penalties or fees within a specific time frame. This could be used to purchase gold, take the profits as the gold market goes up, and then repay your Retirement without incurring fees.  It certainly poses an interesting conversation.

  • The spread between London spot and the COMEX April 2020 contract blew out to a never-been-seen-before spread of over $100.
  • The bullion banks precipitated this move by covering huge short gold derivatives positions that they have held for an extended period of time.
  • The total gross value of the world's banks' derivative exposure exceeds $600 Trillion.
  • The actions by the bullion banks indicate a high degree of uncertainty and concern about the financial impacts of recent actions taken to mitigate the effects of the pandemic.
  • Physical gold is the ultimate hedge.

Now that the bullion banks are covering their decades-old short gold derivatives positions, it's time to buy gold. If the banks don't want to be short, it's time to go long. The recent blowout of the COMEX April 2020 futures contract price above the London spot price is evidence of this action and a glaring indication of significant adjustments being made by the major gold market participants.

Banks are closing out their short gold positions after all these years because of the present world health/financial crisis and the steps being taken to salvage the world's economies. Frank Holmes' recent article, "Excess Money Supply Has Been Like Miracle-Gro for Gold," provides context.

The present circumstances have also resulted in short-term supply chain issues affecting the banks' ability to maintain their long London positions. And, more significantly, concerns about counter-party risk are leading banks to start reducing some of their $600 Trillion derivatives exposure.

All during my 20+ years trading gold futures on the floor of the COMEX the bullion banks were major sellers of the nearby spread at rollover. This was done to "roll" their huge short positions out to the next active futures month. The banks held these COMEX shorts against their long positions (physical, forwards, etc.) that they held in London, thereby hedging their price risk. So the banks typically maintain a significant short COMEX/long London position.

The bullion banks have built these long positions in London as a result of their proprietary trading as well as their role as a financial intermediary and market maker for the various gold market participants such as the gold miners, central banks, refiners, fabricators, hedge funds, etc.

If the rollover that took place in March was typical, the banks would have been huge sellers of the April/June COMEX spread. By selling that spread, the banks would have been buying the April contract and selling the June contract simultaneously. The purchase of the April contract would have closed out the short April position that the banks already held and the sale of the June contract would open the new short position, thereby simply exchanging the short April position for the short June position.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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