Gold "What If?" Silliness

Mish

Peter Schiff and Jeffrey Gundlach posed a "What If?" question on Gold. Let's discuss, including the math.

Jeffrey Gundlach Asks "What If?"

Peter Schiff Video Response

Please flash forward to the 20 minute mark for the discussion.

Schiff accurately comments that longs have the right to take possession of a gold contract, But then he makes a bunch of speculative claims that the gold is not there. 

It is possible that miners may not be able to deliver some contracts if their mines were shut down. 

Gold Commitment of Traders Report 

Gold Commitment of Traders Report 2020-04-20

The COT reports come out on Friday and reflect the positions from the prior Tuesday. Thus, from a COT perspective we are looking at positions from Tuesday, April 14, but the price is current.

As of April 14, the producers were short 108,251 contracts. Producers sell forward. That is what they do. Assuming they have no gold on hand and assuming mine production is halted, then yes, producers could be in trouble IF the longs demand delivery.

Schiff mentions that possibility and I do not dismiss it, but there are two assumptions in play. 

  1. The first assumption is the producers cannot deliver what they promised.
  2. The second assumption is the get caught because speculators take possession.

Swap Dealers

The Swap Dealers are short 172,157 contracts. Schiff acts as if the dealers are not hedged. 

"Given there is a shortage of physical gold, what I think is going to happen is, instead of just rolling over their long contracts to another contract, ... what's going to happen is the longs will say, I want my gold and shorts will have to deliver gold that they do not have. They will have to go to the physical market and buy it but there is no gold to buy. So the price has to go ballistic ..." says Schiff in a long rant from the 20 minute mark to the 24 minute mark. 

But they are hedged. How do we know?

The contract value is such that if the dealers were not hedged, they would have been blown out of the water long ago.  

Possession Math 

Schiff repeatedly states that he expects the longs will take delivery. Really? 

Let's do the math.

How Much Would it Cost For Longs to Take Possession

Each contract represents 100 ounces. The current price of gold is $1701. There are 280,408 long contracts.

For the longs to take possession they would have to come up with a "mere" $47.7 billion at at the current price.

Other than small dealers, jewelry makers,and tiny industrial uses, the bulk of the gold contracts gets rolled over month after month for this reason.

The higher the price of gold, the more unlikely it will be for the longs to take possession.

In February, there were 335,865 contracts. The price then was roughly $1575. At that time, the long speculators would have needed to pony up 335,865 * 100 * $1575. 

That's a"mere" $52.9 billion.

A Word About Speculators

Schiff rails about the "short" speculators. 

But the broker-dealers are hedged, not speculators (otherwise they would have been blown out of the water long ago at these prices) given they have typically been short for something like forever.

Moreover, the longs don't take possession because possession is not as liquid and because the hedge funds like to use leverage. Leverage is not possible with real physical gold.

Ironically, it is the longs who don't take possession who are the real speculators.

Gold vs Faith in Central Banks

Gold vs Faith in Central Banks 2020-01-01

Hyperinflationists Come Out of the Woodwork Again

Like Schiff, I am bullish on gold. 

But forget hyperinflation nonsense as the reason, because it's not going to happen. 

Please see in Hyperinflationists Come Out of the Woodwork Again for a discussion of the silliness of the idea.

No Shortage of Gold

The alleged shortage of gold is nonsense in more ways that one.

For further discussion of the alleged shortage, please see No WSJ, Gold is Not the New Unobtanium: Where to Buy?

Finally, please see my COT analysis: Gold's New Breakout is Very Bullish. 

That is something Schiff and I agree on.

Mike "Mish" Shedlock

Comments (22)
No. 1-10
RonJ
RonJ

Apparently, BofA raised its gold target to $3,000

Tony Bennett
Tony Bennett

Schiff?

C'mon, he makes a broken clock look good.

Please please don't tell me Ron Paul's current thoughts.

numike
numike

the proverbial reply: You cannot eat your gold nor exchange it for food

Tony Bennett
Tony Bennett

"But forget hyperinflation nonsense as the reason, because it's not going to happen."

...

30yr bond yield thumbing its nose at inflationistas (down 9 bps) this morning.

Zardoz
Zardoz

Anybody remember “Ka-POOM” theory from back in the day?

tokidoki
tokidoki

Not sure what Mish is talking about when he says "Gold vs Faith in Central Banks"

After all a lot of Central Banks do own Gold. Also although the Fed does not own Gold outright, they still hold certs issued by the Treasury and supposedly we have the biggest holding in the world.

RedQueenRace
RedQueenRace

"Moreover, the longs don't take possession because possession is not as liquid ..."

Liquidity should not be a concern. "Taking possession" via delivery is nothing more than obtaining ownership of a warrant. As long as the gold remains in the COMEX system it can easily be sold via the futures.

sangell
sangell

I bought 10 Canadian Maple leafs back in 2010. Gold was at $1187 and I paid $1210 for the physical coins. Hardly a 'great investment' particularly since gold is taxed as a collectible at 28%. Bought some gold miners about the same time but they haven't been stellar performers either. Gold won't make you 'rich' but in troubled times a gold coin might buy you something no credit card or wad of cash will.

truthseeker
truthseeker

Mish I would guess that you and Peter Schiff don’t necessarily exchange valentine day cards each year!

El Capitano
El Capitano

Mish this sounds like another Occam's razor deal from you. Essentially, everything in the world is legit, there are no cheaters, there are no conspiracies, yada yada yada. There have always been conspiracies. There have always been cheaters. You pooh-pooh the potential that commex might default. Why do you think commex must absolutely have the gold when we already have the clear and unambiguous data point from history that the US didn't have the contractually required gold back in the early 1970s leading to the "temporary" closing of the so called gold window? If the US can default on the biggest gold contract in the history of man because it was running a fractionally reserved gold Ponzi, why can't commex? Why trust institutions that are known to lie every single day? Do you also think the FBI is honest? Even after the FISA court denounced them publicly for gaming the system in order to get illegal wire taps? Or does that not meet your Occam's razor answer for everything? Do you think the IRS is not corrupt? WE know they are! Don't you see that these were conspiracies?


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