Physical Gold & Silver Activities Are Revealing (Part 2)

May 13, 2013

In the first five months of the year, the physical movement of precious metals in the wholesale arena has been a bit precarious. Physical gold holdings seem to be depleting, while silver holdings are growing. In our first pair of charts, the so-called COMEX-approved warehouses have seen a dwindling of gold to the tune of 3 million ounces. On the other hand, the warehouse inventories of silver have grown by 22 million ounces. (Click on charts to enlarge.)

JP Morgan’s bullion depository can account for about half of the depleted 3 million ounces of gold, which is not surprising given their futures activity. Combined with the activity over at the Scotia Mocatta depository, 90% of the physical off-take of warehouse gold inventories are identified.

But since JP Morgan is issuing the majority of gold deliveries in the futures market, why isn’t all the gold coming from their own vaults? Why involve Scotia Mocatta? Are they partners in this effort?

Now let’s take a look at the diversion of the two most popular precious metal ETFs, GLD and SLV. Since the beginning of 2013, the GLD ETF has reduced its physical gold holdings by 9 million ounces. During the same period, the SLV ETF had grown its physical silver holdings by 21 million ounces, though in recent weeks SLV has also shown signs of diminishing physical holdings.

On top of the physical migration, there also seems to be growth in the naked shorting of these funds. In the last month, the number of shares that have no physical backing has almost doubled for both GLD and SLV.

Ted Butler has pointed out numerous times that the existence of these shorted shares could indicate that the funds are reneging on their fiduciary responsibility to maintain sufficient metal backing. Furthermore, the short situation allows market prices for the metal to remain suppressed because the funds are refusing to purchase the metal, opting instead to allow naked shorts to exist for extended periods. Nevertheless, those shorted shares represent 1.5 million ounces of gold and 5 million ounces of silver that are missing from the physical equation.

An obvious observation here is that the naked shorting is making the physical off-take in GLD look worse than it actually is, while the build-up in SLV is made to look less impressive.

Still, the 9 million ounce reduction of physical GLD holdings (even if the naked shorts are taken into consideration) presents a quandary: Just where did that physical gold end up? Because at least up until today, those ounces have not shown up in any of the visible markets. It either never existed in the first place, was secreted off to some foreign location, and/or now exists in some mighty strong (and quiet) hands, like those of JP Morgan. (It is an interesting coincidence that Germany’s request to repatriate its gold included 300 tonnes held by the New York Fed.)