COMEX Prices vs. Reality

COMEX Prices vs. Reality

Jim Clark

10/9/2015

Both gold and silver had strong breakouts above near term resistance and the price momentum has shifted to the advantage of the bulls. Gold opened the week at $1137 and is currently trading at $1,159, up $22 or 2% for the week. Silver opened on Monday at $15.24 and is at $15.86, up 4%.

The chart below illustrates a technical pattern known as a “rising pennant” showing a series of higher highs and higher lows on significantly increased volume. It is said that “Volume is the weapon of the bull.” This technical pattern along with the increased volume is a very bullish indicator that market sentiment has shifted toward higher prices.

Comex-Gold-Chart
We have been writing about the disconnect between the “spot” futures contract paper prices of gold and silver and the real market demand for physical gold and silver for many weeks. As we have been saying, the paper price for the monetary metals has not reflected the unprecedented and record setting demand for physical gold and silver. We have said that this demand for real world physical metal must ultimately be represented in the COMEX futures market with higher “spot” prices. I believe we are seeing the early stages of that price convergence now with the turn to higher COMEX gold and silver prices. We will address some of the reasons for this disconnect between futures prices and the real world below.


SPOT GOLD IS DEFYING MARKET FUNDAMENTALS

Gold American Eagle Bullion

The spot price of gold and silver has not obeyed the economic laws of supply and demand for at least the last two years. The demand for physical gold and silver is much higher than the supply and as we know, demand greater than supply causes prices to rise. To illustrate this point, on July 24, 2015, sales of physical gold coins by the U.S. Mint were higher than at any point in the past two years, but the price of gold fell to its lowest level in more than five years.  Why are gold and sliver prices an exception to the law of supply and demand? Here is why:

Gold and Silver COMEX futures contracts determine the price for the physical metal. So the supply of paper contracts to sell or buy is what determines the “spot “ price of the underlying metal.  Futures contracts can be created at will so that the supply of this hypothetical gold and silver is limited only by the demand for futures contracts, not by the supply of the underlying metals.  Most of these contracts settle not with the delivery of the underlying physical metal but with US Dollars- 99%  of gold COMEX contracts settle in dollars. This is the inverse of how other futures contracts prices for physical commodities such as wheat, soybeans, cattle and hogs function. The spot price of these agricultural futures contracts is determined by actual physical market supply and demand.

This system creates the opportunity for large players like money center banks and large speculators to drive prices to their own advantage. This is exactly what we have been seeing in the precious metals market.  For example, at 9:30 p.m. on July 19, 2015, someone sold a massive $2.7 billion worth of gold on the futures market, driving the price down by $50/oz. with a single trade.  Large players like JP Morgan and other money center banks have been selling hypothetical gold in the futures market, driving prices down, while at the same time taking delivery of physical gold in unprecedented amounts.

At one point recently, JP Morgan held roughly 30% of the outstanding short contracts (contracts to sell gold) on the COMEX and they took delivery of 600,000 ounces of physical gold from COMEX stocks during the same time period. This is the largest single order for COMEX gold ever delivered to one customer in one year. Putting this in perspective, if you could walk into the Mercedes Benz dealer and drive the price of a $150,000 Mercedes down to $100,000 before taking delivery, you would do that, wouldn’t you?


REGULATORS ARE TAKING ACTION

We wrote last week about the investigation of UBS gold price fixing by Swiss regulators. As reported by Reuters, Swiss officials are investigating gold and silver price rigging among several money center banks including UBS, Julius Baer, Deutsche Bank, HSBC, Barclays, Morgan Stanley and Mitsui. In addition to official regulatory probes a number of lawsuits have also been filed in U.S. courts alleging a conspiracy to manipulate precious metals prices.

We have to wonder, as we watch the developing bull market in gold and silver, are these regulatory investigations gaining traction in moving the precious metals market toward an accurate pricing of gold and silver that reflects the market fundamentals of supply and demand? The disconnect between the “spot” price and the  true market demand  for physical gold and silver is resolving, as we have predicted for many months, in favor of the bulls. This is why you must own physical metals and not paper metals. By owning physical, you control your assets directly and with privacy.


Contact one of our precious metals experts to take advantage of this developing bull market before prices begin to run. Call our Phoenix offices and speak to someone today at 602-955-6500.

“I’ll be keeping a sharp eye on the market and I encourage you to do the same!”
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