Precious Metals, Gold and Silver are pouring into U.S. warehouses at an unprecedented rate since the pandemic. Years of central-bank accumulation in emerging markets may have led to a physical metal shortage in the West. However, a less likely theory suggests that the U.S.A could be gearing up to revalue its gold reserves.
The recent surge of gold and silver into Comex warehouses in the US has sparked speculation that the country may be on the brink of revaluing its reportedly substantial gold reserves—currently priced at $42 an ounce—to align with the market rate, which is now approaching $3,000. It is a theory that cannot be entirely dismissed.
A shortage of physical gold is likely the primary cause. The fundamental difference between paper gold and physical gold. Futures represent paper gold—providing a claim on the physical metal but as the notional value of the paper market far exceeds the available physical and deliverable gold, it would be a disaster if everyone sought to claim the underlying asset at the same time.
This explains why US silver and gold stocks in Comex warehouses have surged higher. And with Gold price is rising relentlessly, the move is dragging in more momentum traders and hedge funds who are buying paper gold, pushing the futures price ever higher above the spot price, and putting further pressure on the underlying supply.
Bullion Banks, act as arbitragers and take the opposing side of long futures positions meaning they are short and responsible for delivering gold upon contract expiry usually face no issues, as these contracts are typically rolled over. Traders have rolled down their Short Positions leaving only the Bullion Banks to handle the carnage.
Where is the Gold Coming From ?
There has been a sharp increase in gold trading volumes on the Shanghai Futures Exchange and does not publish any inventory data. However, the LBMA—the central hub of the gold market—does, and its inventories are declining. So somebody is selling physical gold from London Vaults. Central banks have been on a buying spree since the GFC, and that accelerated after the Russia-Ukraine war. The confiscation of Russia’s reserve assets has led to a decline in dollar reserve assets which has been matched by a near-identical rise in gold reserves.
Nobody wants to Lend / Lease Gold
To ease the situation, Gold can be lent just like the reverse repo rate. But central banks are becoming more reluctant to lend out their holdings. Emerging Market banks don’t want to put it back in the system they have just repatriated it from; and Developed Markets banks may have relied on hypothecated gold that has now been repatriated.
Keep an hawk eyes on the changes in gold market as they are reflective of the major and ongoing shifts seen in the geopolitical tectonic plates over the past few years.
