GLD – The Central Bank Of The Bullion Banks

The black curve (left scale) of the following chart shows the London pm gold fixing in U.S. dollars from 1 January 2006 to 30 April 2012. During the light-blue intervals which span about 35% of the entire period, the gold price increased at an annualized rate of 41.1%. During the remaining intervals, the price increased only at an annualized rate of 7.9%. The light-blue intervals are the result of a trading algorithm whose buy signals are indicated by the green dots and whose sell signals by the red dots.

GLD Inventory Strategy from 1 January 2006 to 30 April 2012

In this article, we explain how the signals can be computed from the variations of the inventory of the SPDR Gold Shares exchange traded trust (NYSEArca:GLD). We explain why the inventory adjustments can hardly be caused by price arbitrage between the GLD share price and the loco London spot price alone. We rather claim that bullion banks finance their inventory by lending it or selling it to GLD investors and that bullion banks manage their physical reserves by accessing the physical gold inside GLD.

The fact that a certain type of inventory adjustments has predictive power, supports the idea that large inventory changes are the result of active reserve management. This provides us with a unique window into the flow of physical gold that is usually obscured by the dominance of paper gold trading. A similar, but somewhat less robust result is shown for the iShares Silver Trust (NYSEArca:SLV).

WARNING (April 2013): This article uses the term buy signal in a technical sense. It does not mean that you ought to buy anything without understanding what you are doing. Notably, the rapid price increases after the buy signals have been absent since the fourth quarter 2012. Now you might dismiss the trading algorithm as a statistical fluctuation. Alternatively, you can wonder whether something might have changed.

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Beware Of The Muppets In The Oil Market

The following chart shows the West Texas Intermediate (WTI) crude oil spot price in US$ (source: US Energy Information Administration).

West Texas Intermediate (WTI) from June 2002 to April 2012

Obviously, there was a speculative bubble from early 2007 to mid 2008 which then collapsed during the second half of 2008. In a series of articles, Chris Cook claims that the crude oil price has been in another bubble since the end of 2009 and that this bubble is just beginning to pop. The present article is an attempt at understanding the mechanics underlying Chris Cook’s ideas.

Backwardation and Declining COMEX Inventory

Silver inventory at the New York Commodity Exchange (COMEX) is declining. Since the beginning of 2011, in addition to the overall decline, a lot of inventory has been shifted from the registered to the eligible category.

For much of 2011, the COMEX silver futures market has been in backwardation. Similarly, the London OTC silver forward market is in backwardation as reported by the London Bullion Market Association (LBMA). Figure 1 shows the Silver Forward Offered Rate (SIFO) from November 22, 2010, to May 19, 2011.

Figure 1: The LBMA Silver Forward Offered Rate (SIFO) 2010-2011

 
We see from Figure 1 that the contango of the LBMA silver forward market collapsed on January 19, 2011, and silver has been in backwardation ever since – with the exception of about 4-5 weeks in March and April. For more background, please take a look at Backwardation in The Case of a Monetary Metal.

In this article, I briefly explain why it is perfectly natural if

• COMEX inventories are declining,
• Silver is being moved from the registered to the eligible category,
• Silver deliveries occur as late in the delivery period as possible,
• Silver deliveries suddenly appear out of nowhere and are checked into the registered category only at the last minute before delivery,

as long as silver is in backwardation. None of these indicates that there is a shortage of physical silver or that there is a short speculator about to default.