SPDR Gold Trust Inventory Remains in a Very Narrow Range

It's been quiet at the SPDR Gold Shares ETF (NYSEArca:GLD) over the last couple months with inventory moving up and down in a very narrow range. However, that may soon change.



Since peaking at 770 tonnes back on October 10th, the equivalent of seventh place in the World Gold Council's Official Gold Holdings (just ahead of Japan at 765 tonnes), inventory moved down slightly and, in recent weeks, back in the other direction.

But, it is quite unusual for the inventory to move within just a 20 tonne range for such a long period of time - normally, it's moving steadily in one direction or the other even if it ends up at the same place months later.

Actually, this same sort of pattern did occur during the first few months of the year as the gold price began its move from about $800 an ounce to over $1,000.

As shown below, after what appears to be frantic additions and subtractions for most of the last year-and-a-half, it's been just small, steady increases lately with another 3.1 tonnes added yesterday afternoon.



It's not clear whether any of this has any significance - most likely, we'll find out soon enough.

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Counterparty Risk May Lead to Potential Squeeze in Gold Market

Gold rallied sharply last week and was up nearly 9% despite continuing uncertainty and a very mixed performance in stock markets. The US dollar index fell some 4% on the week and it looks increasingly likely that the dollar may have topped out and may soon resume its bear market. For the year, gold is now up by more than 4% in dollar terms and by much larger amounts in euros (+11.7%) and pounds (+40.4%).

Gold rallied sharply on the open in Asia and has remained elevated as oil is stronger (up some 4%) and the dollar remains weak.

The FT reported late Friday on the potential for squeeze in the gold market by year end which would see prices rise materially.

The FT’s Chris Flood reported that:

Traders have been hearing talk that the gold market could face a potential squeeze at the end of this year if market participants with futures position on New York's Comex exchange decide not to roll over their positions, because of concerns about counterparty risk and opt for physical delivery instead.

But dealers dismissed the threat of a squeeze, pointing out that Comex gold stocks stand at 8.5 million ounces, well above the five-year average of almost 6 million ounces. ..."

The 8.5 million ounce figure cited by the FT is actually the total Comex gold inventory which includes gold that belongs to customers who are storing it on the exchange which is not available for delivery. The amount that is registered to dealers, and therefore available for delivery, is only 2.846 million ounces. The delivery notices that have been issued so far in December total 1.26 million ounces, which is 44 percent of the available deliverable gold. There is also the possibility that some of the gold may be encumbered in lending/swap operations.

According to the Gold Anti-Trust Action committee (GATA), the Comex authorities themselves have been alerting various futures firms about the potential of a squeeze on the December contract . The Comex is allegedly advising the $840 December shorts to exit their remaining open positions. There have been 12,636 notices of delivery. The shorts have until December 31 to make delivery. Normally they deliver early to take in cash and earn the interest.

This represents about 43 percent of the gold available at the Comex. Some speculate that concerned futures players could buy the February gold contract and then spread into December, which would shock the shorts and lead to a massive short squeeze sending prices markedly higher in a short period of time.

Former Federal Reserve Governor Says Fed’s Gold is Important Asset

Another bullish development for the gold market was former Federal Reserve Governor, Lyle Gramley reassuring that the Federal Reserve’s solvency was not at risk (due to its rapidly deteriorating balance sheet). Gramley denied such concerns were valid as he said the Fed has significant assets in the form of undervalued government gold certificates.

Interviewed Monday last week on the "Trading Day" program of the Business News Network in Canada, Gramley hinted that a big upward revaluation of gold may figure heavily in the Fed's attempt to rescue the U.S. economy. Gramley, now senior adviser at Stanford Group in Houston, was asked about the seemingly grotesque expansion of the Fed's balance sheet in recent months by the program's guest host, Niall Ferguson, an author and history professor at Harvard.

Ferguson asked:

I've heard it said that the Fed has turned into a government-owned hedge fund, leveraged at 50 to 1. Do you feel nervous about what this might actually do to the Fed's reputation?

Gramley reponse was:

I think you have to reckon with the fact that one of the Fed's assets is gold certificates, which are priced, as I remember, at $42 an ounce, and if we were to price them at market prices, the Fed's leverage would look a lot less than it is now.

More signs that gold is increasingly being viewed as the potential savior of central banks internationally from the global deflation gripping the world. The Federal Reserve is one of the largest holders of gold in the world with most of its foreign currency reserves in gold. A devaluation of the dollar and revaluation of gold may help the U.S. government and the Federal Reserve to protect their solvency and inflate their way out of a Depression.

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Gold Ends At Two-Month High

(RTTNews)

Gold surged to a two-month closing high on Monday, boosted by weakness in the U.S. dollar. February gold moved to $836.50, up $16 an ounce. The metal hit as high as $843.70.

The dollar dropped to a two-month low of 1.3703 versus the euro on Monday ahead of an expected interest rate cut by Federal Reserve. Gold usually moves opposite the dollar because of the precious metal's hedge appeal.

Following the conclusion of a two-day meeting on Tuesday, the Fed is widely expected to cut its key short-term interest rate by 50 basis points to 0.5%.

On the economic front, the New York Fed Index index fell to a negative 25.8 in December from a negative 25.4 in November, with a negative reading indicating a contraction in the sector. Economists had been expecting the index to fall to a reading of negative 27.0.

Separately, a report from the Federal Reserve said that industrial production showed a moderate decrease in the month of November, with a decrease in output from the manufacturing sector more than offsetting increased output from the mining and utilities sectors.

Industrial production fell 0.6 percent in November following a revised 1.5 percent increase in October. With the decrease, industrial production was down 5.5 percent compared to the same month last year.

Last week, gold added $68.30 from the previous Friday's close despite a $6 drop on Friday. The precious metal fell $67 last week, its first weekly decline in five weeks.

by RTT Staff Writer

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Dollar Down, Gold Up

I have been and remain a bear on the dollar. Back in mid-August, I conceded that the gathering momentum in the dollar trade would postpone the weak dollar scenario until 2009. I was wrong on a few of my reasons for expecting continued strength in the dollar, but a stronger dollar is what we have.

I know a lot of dour folks have explained why they expect America's "well-intentioned" borrowing and printing binge to lead to rampant inflation in the future (Peter Schiff is one of many examples). I have also tried to make the case. The main crux of my current opinion is that America will win its fight against deflation, sooner rather than later, and will be too slow to remove the monetary (and fiscal) injections into the economy to stave off the high inflation we will get as our reward.

The first signs of fresh dollar weakness are finally showing up. The chart below (click to enlarge) shows a potential double-top in the dollar. Some technicians may prefer to call it a head-and-shoulders pattern.

It is at these kinds of critical transition points that people who want to cling to the former trend will proclaim the loudest that all is well. Dollar bulls surely believe that the fundamentals of the currency have never been better given the world's belief that the dollar represents a safe place to park in a world of turmoil. Maybe major global governments borrow and print even faster and harder than we are doing. If that happens, I will have to like gold even more since its global supply will not increase nearly as fast as the supply of global money. Regardless, we should all know by now what results when a massive crowd jams into one side of a trade - short-term Treasuries represent the powder keg du jour.

Until recently, it has been difficult to play commodities in anticipation of reflation given prevailing downtrends. Gold has held up better than most but it too is still caught in a downtrend of lower lows and lower highs. The recent weakness in the dollar has perked gold back up, and I am sticking to it as one of my favorite places to be for 2009.

The dollar down, gold up scenario gets delayed again if the dollar manages to make a new high above the recent double-top and gold makes another lower low.

Be careful out there!

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Gold Holds Near Two-Month High as Policy "On the Fly" Fails to Cut Corporate Debt Costs or Stoke World Economy

London Gold Market Report
By: Adrian Ash, BullionVault

THE SPOT PRICE OF GOLD BULLION came within $1 of a new two-month high early Monday in London, holding onto last week's 9% jump and recording its best Morning Gold Fix since Oct. 16th for US investors.

Crude oil and the Tokyo Nikkei index both jumped more than 5%, but European stock markets gave back their opening gains by lunchtime.

German bund and UK gilt yields fell as prices rose on a raft of poor data.

The Gold Price in Sterling recorded its best-ever AM Fix at £551.23 an ounce.

"Precious metals are benefiting from the much weaker Dollar as we head into year-end," reckons Walter de Wet at Standard Bank in Johannesburg, but "volumes are low and prices volatile."

For gold investors, "Primary support is at $810, with secondary support at $800 and $777," he believes.

"Resistance is at $832, $841 and $862."

Monday morning saw the European single currency touch a two-month high near $1.3500, capping the Gold Price in Euros below €615 an ounce.

The Dollar bounced against the Japanese Yen, however, rising from a new 13-year low beneath ¥90 after Tokyo – still paying nothing to cash savers in a bid to revive its economy after two decades of stagnation – reported the sharpest collapse in manufacturing sentiment since the late 1970s.

China's industrial output growth slowed to 5.4% year-on-year in November, Beijing said this morning, the slowest rate in 9 years.

Twenty-six economists polled by Reuters averaged a forecast of 7.1% growth instead.

Looking ahead to Wednesday's interest-rate vote by the Federal Reserve in Washington, more than two-thirds of futures bets expects a 0.75% cut to rates of just 0.25%.

Data from the New York Federal Reserve, however, shows that in the Fed funds rate already stands below 0.15% in the open market as the central bank floods the system with money.

The Fed continues to refuse a Freedom of Information request by Bloomberg News asking it to name the recipients of over $2 trillion in emergency loans funded by US taxpayer.

A report in the Wall Street Journal said on Saturday that president-elect Barack Obama will spend $1 trillion on trying to stimulate the economy over his first two years in office.

"If it looks like Bernanke and Paulson are making all their policy moves on the fly," writes fund manager and accredited-investor advisor John Mauldin in his Thoughts from the Frontline, "it is because that is exactly what they are doing – as would any person in their respective offices.

"There is no playbook with a set of standard policies and procedures that can be used in case of a credit crisis."

Across the Atlantic in Europe this morning, world-leading banks including HSBC, Santander and BNP Paribas admitted to investing in the "Ponzi Scheme" hedge fund run by former Nasdaq chief Bernard Madoff.

Holding $17 billion in assets but already guessing losses to be "at least approximately $50bn", Madoff told an FBI agent last Thursday there was "no innocent explanation".

Now "broke...insolvent," his fund – popular with fund-of-hedge-fund clients – "paid investors with money that wasn't there," Madoff confessed.

"You still have a massive paranoia in the marketplace and you've got that safety-at-any-cost mentality," says Jay Mueller, manager of $3 billion in bonds at Wells Fargo in Milwaukee.

Pointing to the zero-to-negative returns offered by government bonds, "People are not buying Treasury bills because they think the yields are attractive," he added to Bloomberg. "They are buying them because they are afraid to put money anywhere else."

Despite the collapse of official US rates and government yields, however, the interest charged to corporate borrowers has leapt in the debt markets the newswire notes.

The yield premium for corporate borrowers has risen from 2.96% above Treasuries in January to 8.85% according to Merrill Lynch data.

"We have the Fed interest rate decision this week, which should be the last big event of the year," says Afshin Nabavi, chief precious metals trader at MKS Finance in Geneva, speaking to Reuters.

"Everyone is banking on a lower interest rate in the United States. If the Dollar continues to lose value, of course it will benefit Gold."

Meantime in the Gold Mining sector today, Australia's official Bureau of Agricultural & Resource Economics forecast a 3% drop in global gold output for 2008, but pointed to a slight recovery for 2009.

Gold mine output peaked worldwide in 2003, back when the price of gold stood at one-half of today's levels against the major world currencies.

World No.1 Barrick Mining today resumed operations at its North Mara project in Tanzania following an attack by 200 or more local villagers – variously demanding gold, sand, better environmental standards or fewer beatings from the mine's security staff, depending on which press reports you read – closed the mine Friday.

Back in New York, meantime, latest data on US derivatives showed late Friday that the total number of contracts outstanding in Gold Futures and options has now shrunk by one-half from the record top of January.

Hedge funds and other "large speculators" have closed out nearly two-in-every-three positions from mid-March – back when the Dollar Gold Price topped $1,000 an ounce – as investment banks shut down their prime-brokerage lines of credit.

Adrian Ash
BullionVault

Gold price chart, no delay | Gold investment – simple, safe & efficient

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

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Gold Gains On Weaker Dollar, Higher Oil

Gold prices turned higher on Monday morning, pushed by a weaker U.S. dollar. Gold for February delivery rallied to $829.70, up $9.20 for the session. The metal hit as high as $833.80.

The dollar dropped to an eight-week low versus the euro on Monday and also saw weakness against the Canadian loonie. Gold usually moves opposite the dollar because of the precious metal's hedge appeal.

Traders anticipated another interest rate cut by the Federal Reserve following the conclusion of a two-day meeting on Tuesday.. The Fed is widely expected to cut its key short-term interest rate by 50 basis points to 0.5%.

On the economic front, the New York Fed Index index fell to a negative 25.8 in December from a negative 25.4 in November, with a negative reading indicating a contraction in the sector. Economists had been expecting the index to fall to a reading of negative 27.0.

The price of gold gave back some of its gains from this week on Friday as traders sold assets for cash amid the U.S. auto industry turmoil. Gold for February delivery closed at $820.50, down $6.10 for the session.

Despite the drop, gold closed the week sharply higher. The precious metal added $68.30 from last Friday's close. The precious metal fell $67 last week, its first weekly decline in five weeks.

Oil prices gained on Monday morning and touched above the $50 a barrel mark. Light sweet crude for January delivery surged to $49.71, up $3.53 for the session. Oil hit as high as $50.05.

by RTT Staff Writer

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The Significance of Gold Backwardation

I’ve written a short series on what is, in my opinion, the major economic event of gold going into backwardation and what this will mean. Due to recent interest, particularly email comments, in this article I would like to further describe this event and in the next part share links to more gold and silver news on this topic with you (as well as some objective criticism of Fekete).

I think it is also important to note that I am no expert. I fully realize I could be wrong for now, or misjudge how the government forces will intervene. It is far from clear whether this backwardation will become permanent. That said, I do believe that the resistance shackling gold and silver will be eventually be overwhelmed; it’s just a question of when. In the final analysis, Gold is the world’s greatest chance at economic liberty and a world with far less war.

Part I: "The End for the Dollar and all Fiat Currencies (1/5)" Part II: "The Next Bubble to Pop! (2/4)" Part III: "On Gold and Market Manipulation (3/5)" Supplement to explain futures market basics and backwardation: "The Money Matrix - What the Heck Are Derivatives? (PART 10/15)" Part V: "More on Gold and Silver Backwardation and Manipulation (5/5)"

Let’s return to the rice example I used in an earlier article, which is traded on commodity futures markets in a similar fashion as gold and silver are today. Let’s say I absolutely must have 1000 bushels of rice 1 month from today. At the futures market, I have two options – I can buy a 1-month futures contract and take delivery right before I need it, or I can buy at the immediate market price (or spot price) and store it for a month.

Now, let’s say rice goes into backwardation. This means that the spot price is more expensive than the 1-month futures price. So, normally I would buy the futures contract since it is cheaper and the storage cost is borne by the other party. And if enough people did this, backwardation would quickly disappear. Now why would I buy at spot price?

I would buy at spot only if I feared that within a month the other party would not have any rice to deliver. Now the strange thing is that for backwardation to continue to exist, all rice traders at the market need to believe the same thing. Why?

If other traders holds surplus rice and do not need it for a month, and believe they will get delivery 1 month later, they will release this stock into the market (driving the spot price down and the futures price up) and take delivery in a month’s time, which would give a tidy basis profit (spot price minus the futures price), plus the savings of not storing the rice for a month.

So therefore, backwardation is the sign of a very tight market, and a market that will be tight for sometime into the future – either 1) current supply is very tight, 2) future supply is projected to be very tight, or 3) there is a severe distrust in counterparties – that the short positions can deliver the goods on time per the contract, or vice versa that the long positions will not have the cash.

That said, backwardation in seasonable, weather-dependent perishable commodities like rice or corn is certainly not unheard of. It even sometimes occurs with industrial commodities like lead or copper. Sometimes it can even be the natural state of the market.

However, gold futures are completely unlike these other commodity markets. Gold is mostly traded solely as a "store of value"; the jewelry or electronics or dentistry demand pales in comparison to the quantities of the yellow metal traded as a store of value (even an "anti-dollar" if you wish). In other words, gold is not a consumable market.

And here is the final piece to the above from South African Daan Joubert, quoted at lemetropolecafe.com. Gold backwardation can only mean that either "a) There are enough people so concerned about non-delivery that they will pay a large premium to get their hands on gold right now" or "b) There are no large holders of gold who have sufficient faith in the futures exchange to exploit the [backwardation]."

Dr. Fekete has issued two recent updates, "Has the Curtain Fallen on the Last Contango in Washington" and "There’s No Fever Like Gold Fever." I consider both must-reads, especially the conclusion to the "Gold Fever" article. I will freely admit to you that for some of the reasons Fekete mentions in the "Gold Fever" article I considered not writing this series under my own name (perhaps I may later regret it) but there is something about sharing the truth as I see it that forbids me what ultimately amounts to cowardice. Anyways, here is the intro to "Gold Fever":

Here is an update on the backwardation in gold that started on December 2 at an annualized discount rate of 1.98% and 0.14% to spot in the December and February contracts. It continued and worsened on December 8, 9, and 10 as shown by the corresponding rates widening to 3.5% and 0.65%. It is nothing short of awesome. This is a premonition of a coming gold fever of unprecedented dimensions that will overwhelm the world as soon as its significance is fully digested by the doubting Thomases.

Keynesian economist John Keynes once pessimistically noted, "In the long run, we are all dead."

I say, YES, the day when gold or silver breaks the COMEX IS death.

Death to the Keynesians for all the havoc they have wrought.

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