Maguire: “The downside for the central banks is that short-term interventions have further emptied the physical vaults (once) again. And where is this gold coming from? It’s coming out of unallocated bullion bank inventories (at the Comex). The central banks may be leasing out gold, but it’s not leaving their vaults (at this time)....
“The liability rests on a daisy chain of bullion banks, and so it will be the bullion banks who are going to be cash-settled by the central banks, leaving physical buyers on the sidelines.
The Fed is so desperate to defend the (US) dollar against gold in the foreign exchange markets that we are moving ever-closer to an inevitable LBMA default, with a cash bailout of the bullion banks. Wholesale demand in London remains well over elevated (historic levels), and it’s been in sovereign size this week. And any dip under $1,300 would again bring in large central bank buying.
The paper market discounting may have bought the Fed a little time, and allowed the bullion banks to get further net long in the futures (markets), but it has exacerbated the physical tightness. On two days this week we saw cash gold trading 85 cents in backwardation to December. That says it all to me.
... in the foreign exchange gold markets ... it’s essentially being used by the Fed and the Bank for International Settlements (BIS) as a way of propping up the (US) dollar. The result of that is, of course, discounted gold prices, and people turning up at the (London) fix and saying, ‘Thank you very much, I’ll take that (physical gold at this discounted price).’
Of course that’s a problem, but as I also mentioned, there is no physical actually leaving these central banks any more. Whereas before, some years ago, we used to actually see physical metal that was leased coming into the marketplace to be sold by the bullion banks.
Now, what they (bullion banks) are doing is taking a paper shuffle. They are getting a guarantee from the central banks to take physical (gold) out of their unallocated accounts, which are already stretched to the limit, and they have to provide that into the (physical) marketplace (in order to meet demand).
We do get the Bank of England fly-wheeling any shortfalls in physical delivery on a day-to-day basis, but obviously this is all, ultimately, falling on the bullion banks. That’s why it’s going to result in a cash settlement. What’s going to happen is the central banks will turn around one morning, or evening, and say, ‘That’s it, we’re going to settle the bullion banks for cash.’
It’s just an electronic keystroke. What does it cost, a few billion dollars to bail them out on a cash basis? What it will mean is anyone sitting with what they think is physical (gold) in an account is going to wake up the next morning, having been cash-settled the night before, as the bullion banks will have been settled on that basis, it won’t even be called a default because technically the bullion banks can settle for cash, then it (gold) will take off and gold will gap up $100 or $200 (or more).”
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