Marc Faber: When China Implodes, This Might Be Bullish For Gold

A very important development is happening today in China.

One after another company in China is defaulting on its debt. Marc Faber quotes: “We have a gigantic credit bubble here in China.” Example: Zhejiang Xingrun Real Estate Co real estate developer defaults. Chinese bank defaults.

What this does to the yuan is obvious, the yuan is declining. If it manages to go above 6.2 USD/CNY, you can expect large problems as the China carry trade will halt and many people invested in Chinese structured products will be in the dumps.

Marc Faber confirms this in the next video. He expects Chinese GDP growth to slow 50% from 8% to 4%. You would think that when the yuan drops, Chinese can’t buy that much gold anymore, but Marc Faber has another view on this. The yuan could drop and as a result Chinese gold demand could actually go up due to people protecting themselves from inflation (and defaults) in China.

Media Ignoring Record Lows in COMEX Registered Gold

I always get a rush when we get a new low in registered gold at the COMEX and today it’s bull’s eye again.

COMEX Gold

We hit a new record low of 370 thousand ounces at the COMEX gold.

Indeed, leverage is going up exponentially. We are now at ratio eligible to registered gold of 20.

And what I find very amazing is that the media is ignoring this in our face.

Take for example this article.

I quote what they say about silver:

Stockpiles of the metal on the Comex on Jan. 8 reached 176.88 million ounces on Jan. 8, the highest since July 1997. In 2013, supplies rose for the third straight year, the longest run in a decade.

But nowhere they mention the plunging stock at the gold warehouses. Keep your blindfolds on…

P.S.: China is now removing bank restrictions to import gold into China. This exponential curve will only accelerate.

What do new rules at LME mean for metal prices?

Weeble posted an interesting question, which I don’t know the answer to, but I can guess:

Albert, I always find your blog very educational.
I am interested in what you think of the following. It seems to me to be a big deal but nobody is commenting on it. Will it cause more bullion to come in to the market short term or will the increase in transparency show the weakness in the system? Thanks.
http://uk.reuters.com/article/2013/11/07/uk-lme-warehouses-idUKBRE9A611O20131107

So basically the LME shortens the warehousing queues by decreasing waiting time duration to 100 days (July 2013) and now to 50 days (November 2013). Beginning from April next year.

I’m not an expert on LME warehousing. But what I’ve read is that traders think it will make prices of commodities go down, because all that supply goes into the market and it would become less attractive for warehousing companies to bid for metal. On the other hand, this change in plans means lower warehouse levels and that will make delivery more difficult. There will be delays. What if there is a sudden demand in copper in China while warehouse levels are lower and what if dealers need to deliver on the expiring short positions. We will see backwardation. As a matter of fact, backwardation is correlated with LME copper levels as shown below.

You can see that LME copper levels go up and down (Chart 1) in striking similarity with the copper contango curve (Chart 2: red graph). It’s too early to make conclusions though…

Chart 1: Copper Warehouse Stocks Level

Chart 2: Copper Contango Theory

And as you know from the copper contango theory, if copper goes into backwardation, the copper price will go up. So a lower LME warehouse level due to the new rules at the LME, will result in higher copper prices. That’s my guess.

Remember what we had in the nickel market. We almost had a nickel default at the LME in 2006.

Excerpts from the LME’s press release of August 16, 2006:
Those with short positions in nickel falling prompt on Friday 18 August 2006, and on subsequent prompt dates until further notice, who are unable to effect physical delivery an/or unable to borrow metal at a backwardation of no more than $300.00 per tonne per day, shall be able to defer delivery for a day at a penalty of $300.00 per tonne. Those with long positions for prompt on those days who are subject to deferred delivery shall be entitled to compensation of $300.00 per tonne per day

And what happened when nickel was at record low stock levels? The nickel price soared afterwards.

Chart 3: Nickel stock levels Vs. Nickel Price

Everything points to higher prices in my opinion.

Is the gold there?

As the gold stock at the COMEX keeps dropping precipitously, we get more and more signs that the banks and warehouses don’t have any gold or silver available for delivery. Junk silver premiums made a new high of 27% today. Chow Tai Fook in Hong Kong is out of gold bars. It’s only a matter of time now, when this will become mainstream media.

Edit: On 24 april, registered gold hit a new low and total gold stock hit a new low at 8 million ounces. This drop is the largest one in years. Something is happening.

COMEX Default Looming?

The latest articles say that the LBMA, COMEX are going to default in the next few weeks. What is all this fuss about?

Apparently the open interest in silver is at record highs while the silver price is dropping. This is not normal because normally the open interest should decline. But let’s first ask ourselves, what is open interest?

Open interest is the total number of options and futures contracts that are not closed on a particular day. If someone opens a call on silver on the futures market, then open interest increases by 1. If open interest is increasing at a rapid pace, that means there are a lot of traders on the futures market making calls (long) and puts (short).

The key metric to watch here is the following:

When open interest is increasing, it means that the price trend in silver will keep going up/down.

When open interest is decreasing, it means that the price trend in silver will reverse the trend.

So what do we have here? We have an increasing open interest in silver, with a declining silver price. That means the drop in silver price is likely to keep going lower as shorts are creating more and more short positions. Once the open interest trend changes, then we will see a reversal in the silver market to the upside.

Chart 1: Silver Open Intrest

So we have a huge battle in the market with a huge increase in short sellers. That increase in open interest is also found in the total stock at COMEX silver (Chart 2). You see the total stock in green is at record highs, while the real physical available silver in blue is not increasing. How can it be that we have so little physical silver in storage for delivery at the COMEX, while trading is so high? If somehow 10% of the longs start to ask for their silver delivery, the COMEX will default. And the chance of default will go up if the open interest keeps increasing. Keep watching the blue line (registered physical silver) as it goes down.

Chart 2: Silver COMEX

Default Looming in Physical Silver: David Morgan

David Morgan, aka Silver Guru, talks about a real possibility of a default (or at least a slow delivery) for physical silver delivery above the amount of 30 million ounces.

So swapping your paper silver or cash to physical silver on the market might end at one moment. Eric Sprott had already bought 10 to 20 million ounces of silver for a few times for the PSLV physical silver trust but David Morgan signals that you can’t continue doing this for long as the silver supply is very tight.

Signs of Comex Silver Default

Just a few days ago I saw a large drop in COMEX silver and now there is speculation on the internet about investors going for the real physical silver. They’re done with the paper silver.

Chart 1: Comex Silver

Tom Cloud was interviewed by the ‘Dollar Collapse’ site and is analysing just this transition to physical silver.

Tom Cloud of National Numismatic Associates has this to say:

Dollar Collapse: Hi Tom. It’s been an interesting couple of days for silver, with a big Comex draw-down being followed by a sizable price drop. If the silver market wasn’t so obviously free and honest, it might be tempting to suspect some kind of manipulation…

Tom Cloud: Late Friday afternoon a big client of JP Morgan requested delivery of 3.6 million ounces, which is 17% of all the registered inventory of silver (assuming it’s all really there). But only 1.6 million ounces were reported moved. A lot of people are asking where the rest of it is. If it wasn’t immediately available and the client allowed JP Morgan to move it in pieces, that’s another sign of very tight supply.

Ordinarily seeing that much silver inventory move would make the price go up, but at the same time they – probably the same people — were buying shorts to drive the market down late in the day when trading was slow.

DC: The size of the silver draw-down raises the question of what happens if a few more big players want to turn their futures contracts into physical metal. Would this cause a delivery disruption or outright default on the Comex?

TC: Somebody stepped up and said ‘no more paper for me; it’s time to get the real thing in my name.’ They’ve played the [paper silver] game and benefited from it and now they want their silver. But not everyone can do that. There is 100 times as much silver paper [in the form of futures contracts] as there is physical, which means a lot more people think they own silver than there is silver in the world. At some point someone will be left out. If 17% of Comex inventory is taken out in one move, then you don’t need that many more big players to take delivery to see this thing fall apart.

A lot of people were already worried about this, and what happened Friday certainly raises the odds that others with paper claims are going to ask for physical. This morning I’m seeing a lot of dealers buying a lot of silver for their own inventories. This is a very scary situation.

DC: Has an exchange ever defaulted on a commodity?

TC: I don’t know of one that has completely defaulted, where they drain their warehouses of product. So it would be a huge event. And the picture for gold, though not as urgent as silver, is also pretty tight, with futures contracts far exceeding available physical.

DC: So what does the prospect of a Comex default mean for precious metals investors? How can we play it?

TC: Only gold bars from major fabricators like ScotiaMocatta and Johnson Matthey can be used to settle a Comex futures contract. That is, they’re approved for future delivery. When the shortage hits, if you’re holding one of these bars the premium is going to shoot straight up, so in addition to a higher spot price you’ll make money on the wider premiums. Because of this, a lot of my larger investors buy Comex bars exclusively instead of coins.

There are now ten different mints producing Comex gold bars. Two years ago there were four. Comex is smart. They know it’s gonna hit the fan and are now willing to approve other brands in order to increase their sources of metal. I don’t think they’d be approving these other brands if they didn’t expect a default. It’s the same with silver. 24 months ago there were two approved fabricators, Johnson Matthey and Engelhard, making bars you could deliver on a futures contract. Today you’ve also got Ohio Precious Metals, Academy, and Royal Canadian mint.

But even in the absence of a Comex default, bars are cheaper than coins. They’re not made by a country, but by large refineries, and because of this their premiums are lower. One exciting thing that happened this year is the introduction of one-ounce Comex silver bars from Johnson Matthey. The premium is $2 an ounce, which is about $0.75 an ounce more than for a 100-ounce bar. But it’s a dollar an ounce cheaper than for a Silver Eagle coin, so they’re selling very well.

DC: How do you store Comex bars once you’ve bought them?

TC: Several ways. You can take delivery of them and arrange your own storage. The newest state-of-the-art depository is Diamond State in New Haven, Delaware. They’re tremendous. A buyer can arrange to have their bars shipped directly there, generally for free. They’ll handle the paperwork and charge an annual storage fee. If you buy through us, we have a warehouse where customers can store their bullion for three years for free. It’s allocated, so you own specific coins or bars, and it’s all insured.