ECON Is A "Commercial Signal Failure" Upside Explosion Coming In Gold?

[spinnaker]

A commercial signal failure occurs in the commodities market when the amount of demand for physical delivery of a commodity - in this case gold - exceeds the ability to physically deliver the available supply by those obligated to deliver. In this case that would be the parties who have sold short the Comex December gold futures contract (primarily Goldman Sachs, JP Morgan, HSBC and Deutsche Bank). If this does indeed occur, the price of gold and silver will do a veritable moon-shot in price.

The situation in December gold on the Comex could get quite interesting. As of today's trade date, there are 94,544 open December gold futures contracts. Anyone holding one of those contracts who does not or can not take delivery (1 contract = 100 ozs, or roughly $118,000) of Comex gold needs to have that postion sold by the end of trading Friday. Tomorrow the Comex is closed and Friday will be a low volumn day. The reason for this is that Monday is what is known as "first notice day," which means that anyone long a gold contact (or silver) can be tagged with a delivery notice.

Now, the amount of gold being reported by the Comex as "registered" (not that we trust that number) - which is the amount that is available for delivery - is a little over 2.1 million ozs. If o/i (open interest) on Monday is any where over 21,000 contracts (2.1 million ounces), December could be a very interesting month for gold. In other words, if the open interest at the close of trading Friday is greater than 21,000 contracts, the Comex has a delivery problem. The price will go parabolic.

With the open interest at 94,000+ right now, and with Friday being a very low volumn day, we can expect that the number of contracts that potentially stand for delivery will far exceed the amount of gold available for delivery. Now, contracts can be tendered for cash instead of gold, and someone holding a contract can sell it after 1st notice day. But, anyone holding after Friday must have an account fully funded to accept delivery because, in theory, every single long position on Monday could be tagged with a delivery notice (this never happens but theoretically it is possible). We'll have to wait until Friday afternoon to know for sure, but I suspect the relentless move up in gold prices this week are sniffing out the possibility of a delivery issue as described above.

Two more interesting items of note, and events which confirm the growing demand for physical delivery and possession of gold. First, it was announced today that the Central Bank of Sri Lanka purchased another 10 tons of gold from the IMF. They said it was a move to diversify reserves, which means they are dumping U.S. dollars. Here's the link: Sri Lanka Buys More IMF Gold. And India has expressed an interest to buy the rest of the IMF gold for sale: India Interested In Rest Of The IMF Gold.

It should be clear to anyone paying attention to what is going on in the gold (and silver) market that there is an aggressive movement by central banks, investment funds and wealthy individuals to take physical custody of large quantities of gold. There is also a massive imbalance between the actual supply of physical gold available for delivery and the enormous amount of paper liabilities for gold. These liabilities include Comex futures, OTC derivatives, leased gold and, of course, the high likelihood that GLD is largely a massive gold leasing operation. The paper Ponzi scheme in gold is starting to unravel and this is being reflected by the price behavior in gold, despite tame inflation numbers coming out of the Government.

SOURCE: http://truthingold.blogspot.com/2009...ide.html#links

[Maher]

Spinnaker - thanks for this article. It will be interesting to see just what happens between now and this coming Tuesday.

[etc]

Interesting....

[tanstaafl]

Before I take stories like this too seriously I feel that the author(s) should explain why many of the gold shorts can't just default on their contracts and declare bankruptcy (as opposed to covering their short contracts at ANY price, which is usually the mechanism cited to justify why the price of gold is about to go parabolic), thus screwing over the counterparties who demand delivery of the physical product (assuming there's no third party insurance on the contracts). Sure, that would create chaos in the commodities exchanges around the world (with probable spillover effects into the rest of the financial world) and whatever business trust still exists would vanish quickly, but these days being involved in a business bankruptcy is practically just another detail on a resume.