COMEX CRISIS: GOLD THROWS THE FED A CURVE

 

The unfolding drama of the comex being forced to deliver gold: something it was never meant to do, is creating the first crack in the Fed's Global Financial Dominance.

Ther comex was created expressly to control the price of gold.  As long as Fed-financed JP Morgan et alii were able to drop unlimited sell order on a paper market, the gold price was forever under the cotrol of the US Central Bank.

Since every other Central Bank has gold as its principal Basel Teir 1 reserve asset along with the US dollar - The Fed has tremendous power over the Global Economy - as it controls to a considerable extent the value of the US dollar and the value of Gold.

But everyone who followed the Gold market has wondered for some time: What happens when other central banks decide to take DELIVERY of the Comex contracts?

What happens to the price of gold?

We are in the prcoess of  seeing that unfold day to day right now.

Friday the Fed knocked the gold price down $50 in a day with a classic raid.  Monday and Tuesday - in stead of creaiting a short squeeze panic (something that has occured with regularity the last 40 years) - the price recovered.

But the other most intriguing question: What happens to the dollar - and the US hegemonic position as the only country to fund its own debt with a reserve currency - when other central banks drop US dominated debt in favor of uncontrolled GOLD as the Tier 1 reserve asset of choice?

That is something that is also playing out.  But at a slower pace and far behind the scenes with no real time measurement of the rate of change.

But one thing is for sure: despite the global move towards  protectionism and mercantalism: it is still a GLOBAL ECONOMY.

That genie is out of the bottle.  All comodity markets are now GLOBAL and are being settled outside the US dollar.

All suply chains are GLOBAL.

Every country can try to reverse this - but they will only succeed at the margins.

If China can supply a cheaper AI or a better Electric Car - no amount of Tarrifs or Sanctions will make a difference OVER TIME.  The best products will eventually dominate the market.

The only thing holding the US hegemony in tact (And the US inflation rate) was the Rerserve Status of the US dollar.

As that goes - so does our control over the Global Economy as well as our conrol over the Domestic Inflation rate.

Nobody's suggesing trends that has been in place for over 50 years will reverse over night.

But they are reversing.

Invest accordingly.

GOLD FLOWS EAST

 

While the Stand for Delivery Comex problem  has begun to receive attention in the financial press, there is an important aspect to it that is being largely ignored but which is crucial: the Stand for Delivery Contracts are from the East.

There is a steady flow of Gold now out of Western vaults into ther Vaults of China and the South-east Asian countries, Russia and the East European countries, and the Oil Rich Mid Eastern countries.

And this defines the entire move in the Gold Price thus far.

It used to be an adage that if you follow the flow of gold in the world you follow the flow of Political and Ecnomic power.  From Rome to Constantinople to Spain to France to Holland to England and then to the United States.

Now it is flowing East.  This is a very uncomfortable fact for those who are touting a new Golden Age for the United States, wherein China and Russia and their sattelites cower and kneel in awe of our might.  

Today, most Americans would argue that the flow of gold is no longer relevant in a financialized world wherein Currency is a form of Debt.  Wherein stock prices float ever higher on debt financed stock buy-back programs.  Wherein structural deficits grow ever larger as the billionaire class is subsidized by tax cuts and bailouts, and goverment sponsored contracts, while inflation destroys the purchasing power of the middle class.  

But it is worth wondering where this leads as the countries that are buying gold are doing so expressly in order to dump US debt out of their reserves and replace it with Gold.  

One place it leads is obvious: As our trading partners dump our debt, we will have to buy more and more of our own debt with printed dollars.  We will have to spend more and more to service our debt.  And we will have to exercise control of the long end of the yeild curve.  All of which is highly inflationary.

Meanwhile, we will be engaged in financial warfare with ever greater swathes of the globe, an exercise that is also highly inflationary.

At the same time both of these challenges are a major drag on growth.  Which is highly deflationary.

Over time, this will be a challenge to the New Golden Age.  

And these type of challenges tend to be structural and tend to last decades.

Once gold begins to flow in earnest from one are of the world to another - that trend tends to play out over long periods of time.

And remember: we have only been in this highly financialized world for a few decades.  

Another question to ask is what happens in a highly financialize world as global liquidity dries up and all the liquidity has to come from printed dollars injected by our own central bank?

That is exactly what we are about to find out.

It might be good to own some gold when we get our answer.  At least that's what the East seems to think.

COMEX IS BEING FORCED TO DELIVER GOLD: A CRISIS UNFOLDING

 

The comex has traditionally been a futures/credit market where contracts are settled before the delivery date, and large players like JP Morgan, financed by the Fed, could manipulate the gold and silver price simply by dropping huge quantities of contracts (especially shorts) that forced smaller players to cover their positions.  Then all the contracts would settle before delivery.

But since 2021 large players (unspecified) but many seeming to be from well financed Asian positions, have been taking delivery of the comex contracts.

Since 2021 these "Stand for Delivery" positions have steadily increased, and so far a total of over 2,100 TONNES of gold have been delivered.

But, since the beginning of this year there has been a considerable acceleration in the rate of stand for delivery contracts of gold, that has put a strain on the comex, and they have had to arrange for transatlantic flights from the London Bullion market to fulfill their delivery obligations.

This is true in both Silver and Gold.

These deliveries are supposed to be fulfilled in days.  Some contracts are not being delivered.  And there is a tremendous backlog of delivery contracts.

If the accerleration continues at this rate over 2,200 tonnes of gold will have to be delivered this year.  This is the total of the last three years.  The strain on the comex is at a point where a systemic crisis is in the making.  

If they cannot get the gold for delivery and contracts back up for months and months - which is happening now - the price of gold will skyrocket as sellers of physical will simply hold out for higher prices.

This delivery crisis is unfolding right now.

This doesn't mean the crisis won't be delayed as gold exchanges coordinate to resolve immediate delivery issues.

But the problem is being exacerbated by the fact that major Central Banks (China, Russia etc) and large oil backed sovereign wealth funds are buying most of the fresh supply of gold so that the western exchanges are having a difficult time of finding fresh supply.

And over  time, as more as more Stand for Delivery contracts are exercised, the potential for a delivery crisis accelerates.

A PROBLEM TOO BIG TO SEE

 

We have a problem.  And it is so big nobody can see it.  

We like to talk about American Exceptionalism.  We're better,  we works harder, we innovate better, we out negotiate, out manoever, out hustle our enemies and our freinds in every deal.

But really American exceptionalism is due to our performance in World War II.  We came through that war with the world's victorious military, and with the only intact economy because the war was not fought on our soil. So we ended up with the world's RESERVE CURRENCY.

When you have the world's reserve currency you have the privilege of printing money to buy your own debt.  And, at first, everyone buys your debt because it is the safest and most stable investment, and it is needed to settle large international commidity trades like oil.  And so that is the instrument of exceptionlism - as long as you prudently manage your economy..  And as long is you prudently resist the urge to WEAPONIZE your currency.

That is American Exceptionalism.  Before that it was British Exceptionalism.  Before that it was Dutch Exceptionalism.  All the way back to Roman Exceptionalism and Athenian Exceptionalism.  

And America did manage its economy prudently and resisted the urge to weaponize its currency - Until Nixon took America off the gold standard in 1971.  What ensued was a steady increase of debt that culminated in a massive inflation,  But Volker and Carter raised rates to over %20 and broke inflation.

Then the 1980's came and we began to amass debt in unprecedented quantities.  And when anything bad happened all we had to do was lower rates back below the cost of money, bail out the bad actors with printed dollars, and the debt orgy continued.  And we turned from a surplus economy to the world's biggest debtor economy. 

Then Clinton did away with Glass Steagel and we discovered financialization.  And that allowed for debt to become an instrument for gaining tremendous wealth if you were able to borrow deeply below the real cost of money to buy up real assets.  Wealth became increasingly concentrated in fewer and fewer hands of those with access to cheap debt, and inflation became embedded.

This weakened our reserve currency position but only marginally.  But eventually the debt bomb exploded in 2008 and rates went to zero and the we printed trillions and trillions to bail out the bad actors.

Then covid.  And rates stayed at zero and we printed 9 trillion dollars to bail out everyone.  Meanwhile we began to to toy with tarrifs.  Now tarrifs have a place in a Mercantilist economy.  And many of our trading partners were acting in a Mercantilist manner.  So it can be argued tarrifs were a proper response.   However, we are the only party with a reserve currency.  And you have to resist the urge to weaponize the reserve currency or risk other countries trying to de-dollarize in response to the weaponization.

Then Biden committed the ultimate transgression for a reserve currency.  He kicked Russia out of Swift (a system to clear dollar denominated transactions) and he confiscated their Dollar denominated debt instruments.

The dollar was suddenly the ultimate financial weapon.  

This works as long as there is no alternative to the reserve currency.

But what it does is incentivize other powers to aggressively de-dollarize and set up atlternatives for settling and clearing tranactions.  China, Russia, Middles Eastern oil powers, India, Brazil, and many other sattelite countries have begun to aggressively de-dollarize.

And the first step is shoring up your resereves by replacing dollars with GOLD,

That is the drive of the Gold trade, and it is irreversible until a new global equalibrium is established with new clearing and settling currencies that aren't weaponized or laden with debt.

This will take time.  The dollar and Eurodollat debt markets are massive.  But so is the impetus for other powers to get out from  under the weight of a weaponized dollar.

Meanwhile, what nobody seems to see is that the continued weaponization of the dollar through ever more aggressive Tarrifs is forcing all of our trading parners to ever more aggresively de-dollarize.

So nobody is buying our debt now.  While the debt sprials out of control.  

Therefor we have to buy our own debt with printed dollars.  But this causes inflation to spiral out of control.  And it causes the long end of the yeild curve to spiral out of control.

And here we are.  Racing towards an end game where yeild curve contorl and hyperinflation destroys the economy.

And somehow nobody seems to see it coming.

GOLD MAKES AN ALL TIME HIGH - NOBODY IN THE US NOTICES

 

Gold has made an all time high, rocketing nearly 100 dollars since inauguration day.  Yet nobody in the US has the slightest interest.  We know that because inflows into the GLD ETF move between modestly positive to modestly negative month to month.

Interest in China, Russia, South America, Eastern Europe, Much of Western Europe and the Middle East is at an all time high, led by Central Bank purchases in all of those areas.

But here in the US interest is high in Bitcoin, AI, Trump Meme Coin, Dawgz AI, and Black Box Private Equity Bundles.

This is not a joke.  Nor is it an exaggeration.  Pension Funds across the US are loaded up with "investments" that have no track record, little to no liquidity, and in many cases, no mark to market information.  And not just pension funds, many US investors have borrowed to the hilt to get in on these "opportunities."

Meanwhile, globally the interest in old fashioned boring Gold, Real Estate, Old Master Artworks, Diamonds, and other deathly boring investments are soaring.  The Swiss Federal Pension fund has Gold now as it second highest percentage investment.  The Florida Pension Fund has Bitcoin (bought at an all time high) and Private Equity Black Box investments as its top two "investments."  And when I say Black Box - that means not only are the returns opaque, they don't even know what investments are in the bundles.  The PE firms say that if they told, they would lose their edge.  Seriously.

What is the reason for this extraordinary disconnect?

One thing that might account for the difference in investing strategies is that the Swiss Pension fund has Investmtent Executives with an average of 30 years of proffesional investing experience on its board.  The Florida Pension fund is managed by political appointees none of whom have any proffesional investing experience.  None, not a single one.  They are all lifetime political hacks.  That is not a joke.  Certainly not for the the citizens of Florida. 

According to Warren Buffet the entire US pension fund system is broke on a mark to market basis.  But that's just Warren Buffet; he's really old, so he probably just doesn't get it.

So far AI has little to no monitizable value for the companies that have loaded up on purchases.  This is because AI makes mistakes that are impossible to check without countless editing man hours.  So any company that can be sued for an AI error can't use AI.  That's most of corporate America.

I'm sure some day they'll overcome this drawback.  But right now they're not close.

And as for Black Box investing - Well the financial crisis of 2008 was caused by excactly that type of black box bundling.  It's happening again less than 20 years later.  Repeating the same mistake and expecting a different outcome is the definition of Insanity.

So it is American Exceptionalism or American Insanity?

I don't know.  But Gold is betting that it's the latter.

And I'm betting on Gold.

And eventually some Americans will catch on.  Then the price will really soar.

LONG RATES BACKING UP WHILE THE FED CUTS: GOLDEN ROCKET FUEL

 

This will happen:

As the funding needs of the US government spiral out of control while the tax income is slashed, only one outcome is possible: The US goverment will be forced to issue massive new debt and the markets will demand ever higher rates at the long end.

Meanwhile the Republican Majority supports the president taking over the responsibility for setting short rate policy (That used to be the Domain of the Fed).  And he has made it very clear he wants rates lower, preferably back to zero.  That will be a tremendous benefit to his real estate holdings.  It will be a disaster for inflation.

Period.  End of Story.  This answers the question Cui Bono?  Who  benefits?  The person setting rate policy benefits.  The Billionaire class holding reals estate, gold, art, pop culture memorabilia, and other hard assets, and also some crypto (not a hard asset but an asset favored at the moment by Billionaires in charge of the government.)

Who doesn't benefit?  Anyone who lives and works dependent on job income to feed and house and nurture their families.  Without hard assets their income buys less and less.

And the Fed loses all credibility which will be a disaster for the dollar even further damaging purchasing power for wage earners.

Of course the government will come out with statistics showing Inflation has come back down.  But all that means is that the rate that things are inflating has slowed.

Nothing will ever be cheaper than it is today.  Except Fad Impulse assets.

Insurance, education, housing, food, energy, medical costs  will always inflate under a regime that refuses to raise rates above the real rate of inflation which is close to 10 percent

The last regime with the courage to do so was Carter/Volker even though they knew it was political suicide.  They took rates to 20 percent and caused first a terrible recesion but then a boom that lasted 50 years as each successive regime simply cut rates whenever anything economically challenging occured.  

But Volker raised rates when the US was a creditor nation.  Now we are a massive debtor nation.  So raising rates will be much more painful for everyone who financed purchases at zero and then has to roll over their debts at 7,8,9,10 percent.  All private equity and private lending would go broke.  That's the shadow banking system crashing.  It will not happen.

So inflation must continue to spriral out of control.

And hard assets, especially gold will spiral ever upward.

WOLF RICHTER ON THE DOLLAR"S RESERVE STATUS:

Status of US Dollar as Global Reserve Currency: USD Share Hits 30-Year Low as Central Banks Pile on Other Currencies & Gold

by Wolf Richter • Jan 5, 2025 • 

If the rate of decline over the past 10 years continues, the dollar’s share will sink below 50% by 2034.

By Wolf Richter for WOLF STREET.

The US dollar lost further ground as global reserve currency among many reserve currencies held by central banks. Its share has been zigzagging lower for many years as central banks have been diversifying their holdings to assets denominated in currencies other than the dollar. And they’ve also been diversifying into gold. But the dollar remains by far the dominant global reserve currency.

The share of USD-denominated foreign exchange reserves fell to 57.4% of total exchange reserves the lowest since 1994, according to the IMF’s COFER data for Q3 2024. USD-denominated foreign exchange reserves include US Treasury securities, US agency securities, US MBS, US corporate bonds, US stocks, and other USD-denominated assets held by central banks other than the Fed.

In Q1 2015, the USD’s share was still 66%. Over these 10 years, the dollar’s share of global reserve currencies has dropped by 8.6 percentage points. If this pace of decline continues, the dollar’s share will fall below 50% in less than 10 years, by the end of 2034.