Parallel Universe in Gold: Wall Street’s Record Gold Shorts Amidst Rapid Inventory Depletion

If your source of information is only mainstream media, you’d have the impression that gold prices will be headed for the gutters. That's because gold shorts are at a record.

From yesterday’s Bloomberg: (bold mine)

Hedge funds are the least bullish on gold in more than five years as speculation about the pace of money printing by central banks whipsawed prices, driving volatility to a 17-month high.

Money managers cut their net-long position by 9 percent to 35,686 futures and options as of May 21, the lowest since July 2007, U.S. Commodity Futures Trading Commission data show. Holdings of short contracts rose 6.7 percent to a record 79,416. Net-bullish wagers across 18 U.S.-traded commodities slid 2.1 percent, as investors became more bearish on coffee and wheat.

Gold’s 60-day historical volatility touched the highest since December 2011 last week and a gauge of price swings for the SPDR Gold Trust, the biggest bullion-backed exchange-traded fund, surged 73 percent this year.

Record short contracts from SPDR Gold Trust as of May 23, 2013 (Bloomberg’s chart of the Day)

Another record short contract from COMEX gold. According to Zero Hedge on May 24th “showed that the Comex gold short position grew once again to a new all time high of 79,416 shorts”

In short, Wall Street seem to have repositioned for another assault on gold prices.

Despite such record shorts, so far gold prices has held. 

Japan’s twin bond and stock market crash appears to have benefited gold over the short run.

As a side note; yesterday the public holiday in the US in celebration of the Memorial Day is the likely reason for the late update from stockcharts.com.

Anyway, the interim short term rebound of the yen coincides with gold’s immediate rally. Notice too that gold prices seems to have formed a “double bottom”

What really interest me is the growing parallel universe in the gold markets, particularly the record pile up in shorts amidst rapidly dwindling physical inventories

Comex gold via 24 hours gold continues to plunge 

Harvey Organ reports of a sustained hemorrhage in GLD inventories which he calls a “bullion bank run”.

Last week’s withdrawals:

Friday: 2.41 tonnes

Thursday: 1.5 tonnes

Wednesday: 3.01 tonnes

Tuesday: 8.42 tonnes

Monday: 6.91 tonnes

The point is Wall Street appears to be selling what they barely possess.

I have repeatedly been pointing out of the widening disparities between real physical gold and Wall Street paper gold since gold’s flash crash in April. The chart above from the Daily Reckoning represents the Premium chart of silver coins (which I use here as a proxy for gold). 

The next point is that while Wall Street detests gold, main street loves gold. Thus falling inventories amidst record shorts only means of an on going transfer process of possession from Wall Street to the Physical real markets.

Yet this comes in spite of the obstacles thrown by some governments.

For instance, the Indian government today vastly expanded its frontlines on her war on gold. Today, the Indian government banned loans on gold funds.

From the Times of India

The Reserve Bank of India said on Monday banks would not be allowed to give loans against units of gold exchange-traded funds (ETFs) and gold mutual funds.

As these products are backed by bullion and primary gold, the restriction on grant of loan against gold bullion will be applicable to loan against units of gold ETFs and units of gold mutual funds, the RBI said in a statement.

The RBI also said that while giving loan against gold coins sold by banks, the lenders should ensure that the weight of the coins does not exceed 50 grams per customer

So the Indian government’s sustained assault on gold means official transactions (statistical growth) will be reduced as the black markets take over.

Importantly the Indian government’s brazen siege on gold, which has huge religious and cultural attachment on the Indians, will likely spawn violence in overtime. Apparently like almost all governments, the lessons from history are hardly heeded.

Additionally the robust demand in the physical gold market is being compounded by accumulations by emerging market central banks which have reportedly used the recent crash to add to their reserves.

From another Bloomberg report:

Russia and Kazakhstan expanded gold reserves for the seventh straight month in April, when prices tumbled into a bear market, International Monetary Fund data show. The volume for the Shanghai Gold Exchange’s benchmark cash contract jumped to a three-week high on May 24, while assets in gold-backed exchange-traded products dropped for a 15th week last week.

IMF data showed Turkey, Belarus, Azerbaijan and Greece joined Russia and Kazakhstan in adding gold to reserves last month. Mexico and Canada reduced holdings, the data showed. In China, the volume for cash bullion of 99.99 percent purity rose to 22,455 kilograms on May 24 from 12,521 kilograms on May 23, according to data on the Shanghai Gold Exchange’s website.

Bottom line: When the cabal of Wall Street-insolvent governments find themselves out of physical gold to short or when more people discover of the reality of fractional reserve gold trade used by Wall Street, there will be tremendous repercussions. (As an example: billionaire George Soros' reduced exposure to paper gold which was bandied by media as "bearish for gold" was really a redemption from paper to physical gold)

There will be bankruptcies of institutions who fail to meet required deliveries, perhaps this could have been the plight that led to the closure of the Hong Kong Mercantile Exchange. Gold markets will also be emancipated from political interventions and from the collusion to suppress gold prices. Importantly a gold buying panic to cover on such massive shorts.