Gold has been on an absolute tear lately, marching relentlessly higher in price. The last time Bag wrote about the Gold market was in early November of 2022, with an article linked below titled “Lift off in the Gold Market” complete with a thumbnail picture of a rocket taking off. In that article, Bag claimed Gold was making a multi-year low, and it was time to, metaphorically, load the wagon. In hindsight, that was a stellar call, as Bag missed the actual multi-year stone-bottom by only three days. Anyone who bought back then at $1620 is sitting on an 80% return in a little over 2 years - that is about 33% per year compounded with minimal risk, as gold is arguably the safest asset in existence. With Gold sitting at $2930 the ounce as this is written, Bag thought maybe, for the first time since Nov of 2022, we would take an in-depth look at the current state of the gold market.
To properly contextualize the outlook for gold prices going forward, it is necessary to turn our eyes to the Comex, a division of the Chicago Mercantile Exchange (CME). The Comex is the biggest market for anyone interested in placing bets on precious metals. Being the largest exchange, with the wealthiest players, and the deepest market, the Comex sets the price at which an ounce of Gold (or Silver) trades on the open market. Theoretically, anyone can contract with the Comex to purchase Gold or Silver. Each contract in gold represents 100 ounces, while each contract in silver is 5,000 ounces. Bag uses the word theoretically because (and this is key to understanding the gist of today’s article) less than 5% of market participants (1 in 20) opt to take “Delivery” of the actual metal. The other 95% are speculating on price action and opt to settle their contracts in cash by either taking profits or booking losses.
As with all markets, Comex participants come in two types. There are those taking a “long” position, meaning they are buying today expecting the price to rise …. And those taking a “Short” position, meaning they are selling today expecting the price to fall. Since shorting is a concept that is not widely understood, and particularly relevant for fully comprehending the diabolical genius on display at the Comex, Bag believes it necessary to present some fundamental ABCs on shorting:
A: When shorting, gains are limited, and losses are unlimited. Consider buying (going long) a share of XYZ stock at $10. The maximum potential loss is capped at the $10 invested; you can never lose more. Meanwhile, the potential gain is uncapped, as there is no limit to how high the stock could go. Shorting reverses this. Shorting a share of XYZ at $10 comes with a maximum potential profit of $10 (if the stock goes to zero), while potential losses are unlimited as, again, there is no limit on how high the stock price can go. The risk of unlimited losses understandably leaves only the most sophisticated (and deep-pocketed) players willing to take on short positions.
B: The biggest problem with short positions is rehypothecation (counterfieting). This one is very complicated to grasp, but is absolutely essential to fully appreciate the magnitude of what is going on at the Comex. To that end, we will use a simple example with stocks that hopefully anyone can understand. So here goes: Imagine Tom, Dick, and Harry who all have accounts at the same brokerage. Tom owns 1000 shares of XYZ. Dick wants to short 1000 XYZ. Harry wants to buy 1000 XYZ. If Harry hits the “buy” button, just as Dick hits the “short” button - the brokerage will borrow Tom’s shares, loan them to Dick, who then sells them to Harry. The problem should be glaringly obvious. There are 1000 shares of XYZ at the brokerage, yet two different people have a claim to those shares. Let that sink in.
C: Shorting distorts current market prices downward as it delays buying pressure. Without a short seller present, the brokerage in the above example would have to go to the open market to buy shares for Harry. But because the stock was shorted, the upward price pressure on XYZ Harry’s buy order should generate in the open market, is postponed until Dick decides to buy back (cover) what he sold. The net result of shorting is an immediate downward pressure on price today in exchange for some future upward pressure on price when the short covers.
Now that we understand what “shorting” is and some of the issues it creates, let’s turn our eyes back to the Comex. In terms of position size (who has made the biggest bets) at the Comex, the largest player by far, and there is not even a close second, is JP Morgan Chase. To make matters worse, their position is on the short side in both Gold and Silver. As we learned above in Fundamental A, their potential losses are, in theory, UNLIMITED. This massive short position in both Gold and Silver was not started last week, last month, or even last year - this position was birthed in 1980 and has been more or less growing in size for 45 years! This is truly a generational game they are playing.
For those who might say, “They are a bank with many brilliant financial minds. I’m sure they can manage a short position.” Please allow Bag to regale you with a bit of precious metals history. Back in 2008, the financial crisis was kicked off with Bear Stearns going under. At the time, along with JP, they were one of the biggest silver shorts on the Comex. According to the legendary Ted Butler (RIP), Bear was short between 50,000 and 60,000 contracts. Exact info is tough to find, so let’s sandbag it, use the low end of that range, and call it 50,000. Remember, each contract represents 5,000 ounces of Silver. So 50,000 x 5,000 = 250 million. Yeah, they were short 250 million ounces. In today’s world of billions and trillions, that might not sound like much, but at the time, the most productive US silver miner in terms of ounces mined per year was Hecla Mining (HL). They produced under 10 million ounces that year. Meaning Bear Stearns alone shorted an astonishing 25 years’ worth of mining production.
Consequently, every time silver ticked up a dollar, they were hemorrhaging 250 million dollars. In just the first 10 weeks of 2008, they lost billions on their silver short. The mainstream financial media at the time was quick to blame their bankruptcy on mortgage-backed securities (MBS). While they did have some exposure to MBS, it was the silver short that put the nails in their coffin. An interesting side note to that story is this: The assets of Bear Stearns were sold for pennies on the dollar to none other than JP Morgan. The one concession the Feds demanded from JP in exchange for getting those assets for pennies was that JP had to assume the Bear Stearns Silver short position. Of course, JP had the deeper pockets, so they just added the 50,000 contracts to their own existing short, and never looked back.
All of this begs the question, why are banks, with no connection to mining or refining metals, building and maintaining such huge short positions on the Comex? Based on JP’s behavior, it would be easy to conclude that they believe the precious metals will be falling in price, and they are merely placing a massive bet to profit off their expectation. But nothing could be further from the truth. The fact is, JP is the biggest precious metal Bull on the planet.
How does this make any sense at all, you ask??
Well, to fully comprehend the diabolical genius behind the JP Comex short position, Bag would ask that you try to see things through a banker's eyes. In other words, think like a sociopath unconstrained by even a shred of morality.
JP’s 45-year campaign of relentless shorting of precious metals on the COMEX is a giant scheme to suppress price so that as actual physical metal is brought to market for sale, JP gets to pay below true market price. Imagine a refiner that produces X number of ounces a month. The refiner contracts through the Comex to sell their gold on the last day of the month. What does JP do? They sell a bunch of contracts into the market on the next-to-last day of the month, which puts downward pressure on the price, so when the refiner shows up with actual gold, JP can accumulate at a discounted price. Secondly, the falling price produces mounting losses in the accounts of existing longs, many of whom will sell, booking a slight loss to avoid even more significant losses down the road. Since the Comex is a zero-sum exchange, JP books profit on the cascade down in price, as they are a likely counter-party to many of the longs now booking losses. The end result is that JP has spent 45 years building a physical hoard at below true market prices, they get to book profits on every pullback in price, and they never have to book losses when the price rises because they are not forced to cover or deliver. This is James Bond villain-like behavior.
The whole scheme only works because the COMEX allows EXTREME rehypothecation. How extreme, you ask? In the oversimplified XYZ stock example from Fundamental B, there were two owners with a claim on shares. On the Comex, there are approximately 16 people with a claim on each available ounce of gold in the Comex vaults. Yeah, you read that right. SIXTEEN paper claims are on every ounce. Silver is even worse. And guess who the seller is on most of those paper claims. Yep, the big banks of which JP is the ringleader. The whole thing is a giant game of musical chairs with 16 longs dancing in a circle around a single chair. At some point, the music stops, and 15 of those longs will find out the claims they have on gold aren’t worth the paper they are printed on. Truth be told, the 16th long is probably getting fcked too. When the whole thing crashes and the Feds step in to decide ownership of the gold, Bag will kiss every cows ass in Texas if the Feds don’t hand that Gold to JP.
Fast forward to today, the existing short position by JP is so massive - that if they were forced to cover - the 45 years of buying pressure they have suppressed (Fundamental C) would add zeroes to both the Gold and Silver price. Those of you burdened by scruples might ask, couldn’t JP just use their physical hoard to cover their shorts? They could, but they are not going to. When the timing is right, it is better for them to welch on all the paper metal promises they made. That will launch the price of physical (which they are mega-long) into the stratosphere. This will leave the 16 longs in a legal battle for scraps, while JP basks in a fact any fifth grader could tell you: possession is 9/10ths of the law.
How greedy are they?
Truthfully, their greed knows no bounds, as Bag is about to illustrate. As we mentioned above, 1 in 20 longs are taking actual metal delivery. Once again, those handicapped with scruples might think JP would have to part with a small portion of their hoard to satisfy the occasional delivery demand, in order to keep the game going. But no, these sociopaths have invented a workaround to avoid having to deliver anything at all. It’s called leasing. A jeweler gives notice that he plans to pick up 100 ounces of Gold to make some inventory for Christmas. So, what does JP do? They knock on the Rothchilds door, or the Bank of England (BOE), or perhaps, Fort Knox. Then they say, “Hey - you guys have this big stash of Gold just sitting there, what say you loan me some bars, I will pay you some interest and get the gold back to you in the future - you know I’m good for it, I’m the world’s largest bank.” If you are the BOE, or some bureaucrat in charge of Fort Knox - why not take the deal and generate a little extra income off a “barbarous relic” of an asset which does nothing other than collect dust? So JP takes the leased gold bar and satisfies the jeweler without ever having to touch their own stash.
Bag would argue that the leasing of precious metals is the mechanism primarily responsible for allowing JP to maintain their “Paper” short position for decades. In addition, Bag would suggest the leasing of metal is why nobody has ever been allowed to audit Fort Knox. If Trump manages to kick in the front door of Fort Knox, and Elon gets in there with his DOGE flashlight, army of quants, and the world’s biggest Megaphone (X) - Bag suspects they will find a bunch of paper claims (leases) on gold, rather than actual physical Gold. At that point, the music stops - and the real fun begins.
As someone who has followed the precious metals markets since the 1980s, Bag has thought long and hard about the signals that would appear indicating the Price suppression scheme on the Comex is nearing a conclusion. Here are the top 5:
A spike in the percentage of market participants demanding delivery
A lack of metal available for lease accompanied by a surge in the interest rates of leases
Record level buying by sovereigns and central banks
A sustained rally in the price of precious metals
Backwardation in the metals - meaning participants are paying extra to possess metal immediately
All of those ingredients are present today, in spades. Is it possible they manage to kick the can down the road a little further? They could buy another 6 months, or even a year, but it comes at a cost they will not want to pay. For decades, the interest rate on leased metal has mostly ranged between 1 and 2 percent annually. Those rates have been surging in the last 30 days. The silver rate is north of 10%. This means that as market participants demand delivery - which they are doing in record numbers - there are only three options available for JP and the other shorts. They can part with some of their hoard, begin paying double-digit interest rates on a lease, or default on the Comex contracts. There is no fourth option. Bag can’t see a world where JP pays anyone a double-digit interest rate. Greedy Fcks that they are, Bag doubts they will part with any of their hoard. So the only realistic available option is to default and send the price of physical skyward.
Bag is firmly of the opinion that default is very close. In fact, he would argue the daily news stories of government failures being put forth by the DOGE team are only out there to condition the Plebes for what's coming, namely that Fort Knox is indeed empty. That news will trigger the default, and long-term Gold bulls will be vindicated as the price “moons.” Unfortunately, there will be a lot of hard-working Americans who will get wiped out financially in the aftermath as hyperinflation takes root. There is some good news. The whole debacle will likely usher in the full-blown adoption of blockchain technology. The Government apparatchiks that have been running things for years will likely view the radical transparency that is inherent to a blockchain as nothing more than a bug to be fixed. Considering that opacity got us into this mess, Bag will view that long-overdue transparency as more of a feature than a bug.
For those interested in….
Bag’s Nov 2022 article pounding the table for Gold (Click here)
The government’s corrupt response two years ago when JP defaulted in the “nickel” market. (Click here).
The 1980 Birth of the Short position (Click Here).
A primer on Backwardation and what it means (Click here)
Great and timely article on gold and silver prices.
Assuming you have gold/silver investments, if you don’t own physical gold/silver or miners, double-check the prospectus of your ETF for gold/silver lending. Here are my 3 key takeaways from this article:
1 • Market Manipulation: US banks maintain a large short position in gold and silver to suppress prices and acquire physical gold cheaply, and have done so for decades.
2 • Too many claims for the same physical gold/silver: The way the futures market works (rehypothecation), it creates multiple claims on the same gold, with around 16 claims per ounce, raising the risk of a market crisis if demand for physical delivery rises.
3 • The game changes: Growing demand for physical gold delivery over cash settlements drives upward price pressure and may expose market vulnerabilities, risking a supply crisis.
Here’s my takeaway: leave termites alone for too long, the house falls down.