A recent piece of research by Credit Suisse on the gold bullion and silver bullion market has caught the attention of bullion investors. The switch in Russia’s oil sales to incorporate gold as an accepted payment is causing investors to wonder how this will influence the physical gold market. UK bullion company Auronum is paying their highest premiums when buying back gold and silver bars and coins which should make us wonder what is triggering this.
If the gold for oil trade expands from its current friends only deal into a global market offering of cheap oil for physical gold bullion. This will cause the demand for physical gold to force basil 3 compliant over-the-counter gold to be physically delivered in sufficient size to feed the multi-trillion-dollar oil markets at a huge irresistible discount. Then the non-NSFR compliance of silver will backfire on the professional trade the LMBA talk about. As the price of physical gold bullion easily doubles as Credit Suisse’s Zoltan Pozsar assumes. Why is this important to silver? It’s due to the silvers openly admitting highly leveraged status, and they have admitted 100 to 1. Industry apologists talk about 500 to 1, somewhere in that number, which is huge, is significantly higher than gold. So the prospect of doubling the spot gold fixed price is a huge issue for joined-at-the-hip silver which is likely to triple or quadruple the price into a bid-only market short squeeze.
Now, with this $60 capped oil price currently pegged to a single gram of physical gold. The contention here is that Russia opens its oil market by openly exchanging potentially unlimited quantities of $60 cap barrels of oil to anyone who has physical gold to trade for it then as Zoltan guesses, then the discounted oil for physical gold becomes a race to buy physical gold becomes a major threat to the banks shuffling paper gold inside the central bank cable contained synthetic range.
Now that sanctions have been imposed by the G7, it is to Russia’s advantage to strategically double down on the already existing largely Indian oil for gold swap. Instead offering two barrels of oil pegged to each gram of gold. Just think about the implication of that. The bargain will be impossible to ignore in the global markets and the race to buy immediately deliverable gold to exchange for oil will force the price of gold to literally double. Zoltan estimates $3,600/oz which would be a doubling, roughly, but more highly leveraged silver joined at the hip to gold would almost certainly hard test the $50s. Not only would this double-down strategy bolster the value of Russia’s central bank’s existing stockpile of gold reserves, which is almost certainly if not a primary objective, then certainly a secondary objective of such an offer but it obviously allows them to continue to sell oil. But the sudden un-factored increase in the dollar price of gold, bear in mind we are talking about a Basel 3 compliant over-the-counter spot market once again exposes the Comex-centric EFP imbalance. Now bear in mind we are talking about EFP as simply the exchange for physical where you have a paper market in the Comex able to exchange that paper market into the over-the-counter market which is Basel 3 compliant, so, therefore, becomes deliverable.
Now this imbalance between Basel 3 compliant deliverable spot gold foreign exchange positions, they are currently one-to-one hedged against a Comex short position. So, if we see this fracture occur again, we are going to see a March-like EFP fracture and how we suddenly saw $80 to $100 differences to get out of those positions and to avoid delivery by buying back your short positions on the Comex. Obviously, they are trying to balance this, they are not stupid, but this time, like last time, there was a central bank rescue but this time that is not feasible as the over-the-counter counterpart market is now fully NSFR compliant which was not the last time we saw this blow-up. So let’s see how this game has changed for gold. So, at the margin and always at the margin because of this leveraged situation, despite spot gold being NSFR compliant and the paper-to-physical structure improving dramatically, which it has although muted, the game has continued. For hedging purposes, which is long spot gold positions, they have an offsetting Comex short position, so they are a technical complaint. This is how the CFTC and the regulators say ‘that is fine’ because they consider it to be compliant. But these so-called hedges are structured upon a carefully calculated supply of deliverable physical gold that can be called on for delivery on demand. This trading balance is determined by how many of these NSFR-compliant long over-the-counter positions can be paper squared against the Comex-centric speculators who can be relied upon to bever take delivery inside the Comex casino.
This is where the tail risk to a western central blowback is exposed. As we have identified, the slowly rising stair step ranges that we have been witnessing in gold are determined by how much of the short load can be laid on the speculators. By financing these heavily leveraged spec positions, the optimum point that specs can be rinsed off their naked long or short positions in the actual balance point between the paper and the physical markets i.e., how tight the unleveraged physical wholesale market is weighted against the highly leveraged Comex centric synthetic action. These are the footprints that the insiders cannot hide from the wholesale market and given the primary house insiders holding the book on spec loaned positions, in other words, the specs have loaned it from these guys, they know where the pain points are. Obviously, they have got up to minute information on where the maximum pain point is and they are able to ensure the maximum number of hedged positions can be profitably squared without exposing themselves to physical delivery obligations.
Clearly, this is a much more muted game but explains although the ranges are a lot shallower, this explains how they are gaming the stair-stepping higher ranges. If the cable contained synthetic gold price suddenly breaches through these insider caps ranges triggered by a March 2020-like shortage of physical gold to meet a sudden surge in demand, whereas before it was covid related there were no refineries open, now there is simply a shortage of physical gold and silver bullion. There will be a race to cover an increasingly bid-only paper market.