When the Federal Reserve decided to raise interest rates last December, the experts were convinced that precious metals were going to take a beating. At first glance, that notion seemed to make sense. After all, a higher interest rate should lower inflation and motivate people to keep their dollars in the bank, neither of which would be good for the price of gold.
What these so-called experts didn’t consider, is that our whole economy hinges on easy money. All the economic growth we’ve seen over the past few years has been fueled by monetary expansion, so once the Fed raised rates, the easy money stopped being so easy, and our bubble economy started to deflate. We’re just now seeing the initial results of this decision, with the recent plummet of the stock market and the implosion of junk bonds.
That of course means investors are starting to look for safe haven assets. With the looming threat of another recession on the horizon, gold is making a comeback. By Monday the price rose to a two-month high, and by Tuesday it had reached a three-month high of $1120 per ounce. There’s a good chance that another gold rally is in the works, provided the stock market continues to fall, and the economy takes a nosedive in the months ahead.
Unlike previous rallies, however, there is an ongoing crisis at Comex pertaining to the amount of real gold the vault holds. In September, the number of paper contracts per ounce of physical gold had risen precipitously to 252. According to ZeroHedge, that ratio has since more than doubled.
As the chart below shows – which is disturbing without any further context – the 40 million ounces of gold open interest and the record low 74 thousand ounces of registered gold imply that as of Monday’s close there was a whopping 542 ounces in potential paper claims to every ounces of physical gold. Call it a 0.2% dilution factor.
To be sure, skeptics have suggested that depending on how one reads the delivery contract, the Comex can simply yank from the pool of eligible gold and use it to satisfy delivery requests despite the explicit permission (or lack thereof) of the gold’s owner.
Still, the reality that there are just two tons of gold to satisfy delivery requests based on accepted protocols should in itself be troubling, ignoring the latent question why so many owners of physical gold are de-warranting their holdings.
We’re officially in uncharted waters here. At this rate, there won’t be any deliverable gold left in the vault by the end of the year, which has never happened before. Comex is one of several vaults that determine the spot price of gold, so what happens when they finally run out? Will the spot price of gold plummet while the value of real gold goes in the opposite direction? Will the next rally favor paper gold, allowing the Comex vault to restock their dwindling supplies? Or will any of the owners of paper gold even notice that nothing real is backing their portfolio?
Stay tuned. When the next gold rally arrives, it’s going to be interesting to say the least.
Joshua Krause is a reporter, writer and researcher at The Daily Sheeple. He was born and raised in the Bay Area and is a freelance writer and author. You can follow Joshua’s reports at Facebook or on his personal Twitter. Joshua’s website is Strange Danger.