Weekly Wrap Up

Consolidation, Deliveries, and Is The Wait Over? - Weekly Wrap Up

WWU with Andrew Maguire

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In this week's edition, Andrew Maguire, Independent London Metals Trader and Analyst sits down with Craig for the Weekly Wrap Up. He is internationally renowned for his unique ability to read the precious metals market with his specialist knowledge and over forty years experience trading in financial and commodity markets.

Andrew dives right in this week with a detailed explanation on the efforts taken to drive gold prices down over the last 7 months, plus he discusses gold as a tier one asset, Basel 3, and his reasons to believe a 10-15K/oz gold price is on the way. He also takes on some your questions as we approach the end of Q1 and the March deliveries. Lots to listen to in today's Sprott Money Weekly Wrap Up.

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Craig: Happy Friday from Sprott Money News at sprottmoney.com. It's Friday, March 26th, the last Friday of the month and the last Friday of the quarter. It's time for your "Weekly Wrap-Up." I'm your host, Craig Hemke. Joining us in place of Eric this week is legendary London trader, Andrew Maguire. I don't know of anyone who understands the global precious metals markets any better than Andy. He knows how the pieces all fit together. It's not just a dot on a screen or something on a ticker tape at the bottom of your Bloomberg television screen. The global precious metals markets are extremely complicated. And like I said, nobody understands it better than Andy. So Andy, thank you so much for spending some time with me today.

Andrew: Oh, it's a pleasure. And again, this is a revisit to your end of "Weekly Wrap Up." So, always a pleasure to come and join you.

Craig: Well, and I appreciate it. I know Eric appreciates it as well. And of course, for everybody out there, if you appreciate these "Weekly Wrap-Up" segments, or "Ask the Expert," or even our new monthly metals projections video podcast, please be sure to like, share, subscribe on whatever channel you're listening to. That'll help us get the word out. And of course, Sprott Money is the sponsor of all of this. Please consider Sprott Money for all of your bullion and bullion storage needs. You can find more information at sprottmoney.com or, of course, just give us a call, 888-861-0775. Andy, we should just dive right in. It's been a somewhat frustrating week. We've had option expiration on COMEX for the April gold, and a few April silvers, too. That has kinda kept things going in a downtrend that we've...gosh, has been going on for seven months now. Andy, what did you see this week? And what do you see in the weeks ahead?

Andrew: Yeah, that's a good question. And if you remember, Monday, what do we wake up to on a Monday morning is a gap lower open, 30-something cents in silver, gap lower in gold. Out of the blue, really, I think a lot of this is to do with, of course, a bit of a toxic cocktail of the strong dollar and soaring bond yields, one thing and other. But I mean, in fact, we've covered this in an interview that we did in "Live from the Vault" this weekend, and basically resulting in backwardations, resulting in really what is actually turning out to be a very, very, very solid delivery month.

And so basically, what we're looking at, and we discussed very briefly a couple of days ago, is the...we're only three sessions away from delivery of the March contract. Yes, we expired options yesterday for the April contracts, but we're talking about the last potential or possible delivery date that must be delivered by Wednesday, which is the end of the month, which is what COMEX allows. But I think there's something really key here, and I'm gonna look at the... Because this relates directly to what we're seeing that's visible to everybody on the delivery side of things. There's the options exercises that happened last night. And I did a bit of analysis on that.

And so, really what I wanted to do is kinda look at the sheer scale of these directly related massive out-of-the-norm deliveries. And as of today, I mean, summing it all up, we've got some 30 tons of GC, of gold futures contracts, currently stopped or scheduled for delivery. But even more notable, and I know we talked about this, the unprecedented large size of March silver futures standing for delivery. And that stands right now at a massive 1,795 tons. I mean, inconceivable amounts of physical silver. And you do a lot on your site there. You sometimes put up these pallets, and you trust then someone by the pallets. And 1,795 tons of silver is a massive amount of bullion.

And actually, what's interesting is that's 350 tons larger than the largest delivery month of the year, which is, of course, December. We all look at December as that is the biggest delivery month of the year. But to put that into context with January and February, really, they only averaged about 300 tons of deliveries, so we have to take note. Now, I look at the tonnage side of things because we're in the wholesale side of the market. But I honestly, you can obviously translate that back into open interest. But given this unprecedented volume of March delivery standing for physical delivery, we suspect yesterday's... And people are there saying, "What the hell happened yesterday? What was this counterintuitive rinse of the silver 200-day moving average?"

I mean, this was, in our view, a blatant attempt to incentivize the selling and squaring off of positions that had stopped in for purchase $2 to $3 higher. Now, you know, we know these games go on. But these footprints strongly suggest that the put structure is the most unusual that I've ever seen it. I mean, these bearish put and call sales, this time, were largely in the hands of the specs, who were basically psyoped into thinking, "Well, it's just going down. It's an automated sell. You know, the dollar's going up, bond yields are up, commodities are weak. Sell, sell, sell," without any view of the physical market. And of course, that is what we're dealing with now. We're dealing with the result of that is that, hey, the physical market says, "No way, thank you. We're gonna..." You're actually driving a bifurcation between the two markets here.

And what they did, by forcing specs who had sold these puts, like, in other words, that's a bearish bet, right? By pushing them into the 200-day moving average, what it did is forced these guys to sell futures, to delta hedge these bearish bets. So, obviously, you've made a bet against it. You have to then make sure that... Each dollar you're going down, or each cent you're going down, is actually working against you, so then you're forced to delta hedge. Now, what happened was you suddenly saw the spike back. Oh yeah, the insiders. What have they done for years and years, Craig? They picked up the discount down. But the same thing we saw in gold futures. But insiders were really forced to short cover into...and we just talked about this a minute ago, the spike higher, which was actually, came in right at the market open, where the stock market S&Ps opened, and it came within $5 of $1,750 sweet spot before retracing back in thin, very, very postfix conditions.

Now, really, this is what I'm really trying to get to. Let's look at what happened into the April options expiry yesterday. And to be quite frank, this is the largest put-call imbalance I can ever [inaudible 00:07:42] history of gold. And in order to assess if this is gonna result in upside air pockets or downside air pockets, we need to draw attention to this exercise structure. Now, normally, when you see a massive amount of calls coming in and choosing to roll into the front month contract, which is about to expire, and we talked about the April contract here, which is just about to expire, then normally, you would see a very disruptive closing of these intraday position limits going through the roof, but essentially, people closing these calls and waiting, letting a good air pocket appear to the downside, then buy back in the next month out, which is of course, is June. And then that way, you've created this usual enormous volatility that you get.

But in this case, we think it's gonna be ultimately upside air pockets into rollover next week. And the reason I say that is that the number of exercises chooses to roll into this expiring April contract, it was 4.7 times as many puts as calls, choosing to roll into a contract just about to go off the board. And so really, when you think about it, why would you... If you're a plain vanilla options player, you would usually close your contracts, move into the next contract. Why would you choose to actually roll into a contract which is actually suggesting you're gonna take delivery, or you're gonna make delivery?

Now, we're talking about 3,349 puts versus just 7,079 calls, expiring into this contract. Now, I've never seen this before. This, really, what it reflects is the unprecedented number of volume of open interest standing for delivery. And given that the bulk will be rolled or cash settles, we would, in this instance, expect the obligatory insider [inaudible 00:09:53] volatility. But ultimately, we evidence these upside air pockets into rollover. And because really, what they're looking at, there's an exposure here to deliver 104 tons, that have to be... Well, obviously, with their attempt to disruptive, and close and roll them at the last minute, but we see this as actually bullish. But more importantly, given this incestuous relationship between the 10th times larger spot market and the COMEX, the BIS options sweet spot... Now, let me just explain that the options expiry for the over-the-counter market, which is 10 times larger in volume, occurs on the last, at the UK PM fixed hour, on the last business day of the month. So that would obviously be [inaudible 00:10:48] Wednesday, the 31st, which is also the same day that these March contracts have to be delivered.

And given this incestuous relationship, they actually tend to be very, very similar, these sweet spots tend to be similar. And we see that well-structured between $1,750 and $1,775. But the June contract is looking actually magnetic above $1,800. Now, this is the structure as what we liquidity providers talk about, this is what, how people are beginning to position. Now, in the non-delivery SI contract, which is clearly... I mean to say non-delivery contract. I mean, look, this is clearly being the focus of this week's heavy silver action. We saw the gap open, down lower, we've evidenced a week of solid selling. But we also noticed a similar imbalance, but for the same reason, where you had 2.6 times as many puts choosing to roll into the expiring March contract. Now, that was around 4,488 puts versus just 1,742 calls. But that's just a fraction of what actually is purported to be delivered. So, very short-term volatility aside into month end, we also ultimately expect upside air pockets. And really, that's kind of where we were looking at for this March delivery contract, but weighing in all these exercises that occurred last night.

Craig: So we'll now watch into next week, as you said, for the BIS and the LBMA options to price, end of quarter as well, Andy, and that's on Wednesday, as you said. And we'll turn the corner into April. It sounds like maybe if we get a little break on the HFT factors, like the dollar index or bond yields, maybe the stage is set to finally end this consolidation and start trending higher. Does that sound right?

Andrew: Yes, it does. And of course, there are periods of time, as we know, Craig, where the dollar can rise along with gold. I mean it's hard to say sometimes, but the dollar is seen as a safe haven place to... where you weigh it up against all the other fear currencies, I suppose it's the best of the bunch. It's hard to even say that. But essentially, yeah, of course, it can be. And when there's times of uncertainty, we see a run into the dollar, we see the run into gold. We've actually seen some decent legs considering everything. We see some decent legs in gold, if you think about it, this week, compared to the action in silver.

Craig: I agree with you, yes. And there is some hints of stability here. You know, there was a range, Andy, last year, between April and June, were price was, like I said, range-bound between $1,680 and $1,780. And once we took out $1,780, I had to figure $1,680 would be the next support level. And that's exactly what we fell to. And now, we're kinda right in the middle of that range. Do you see kinda similar numbers, maybe a confirmation that the downtrend or the consolidation phase is broken, if we can move back towards $1,780 and $1,800?

Andrew: Yeah. And I think also, this is, again, a situation where... We haven't seen this kind of level of delivery interest since... We saw it in October, I remember that, but also since November. And if you remember, we actually were quite public about this, where we know of two instances where $40 an ounce were paid to two banks to not take delivery, and, of the COMEX deliveries at the time. And what happened, if you look at a chart, you'll see, that was the start of an $8 rise in silver. And it was the start of a decent rally in gold as well. So I think we are back there, at that point, because I think it's really a result of, as we say, this algo market, this, it is, you know, this siloed casino, looking...doesn't look outside the real market, the real physical market. It's just, you know, an algo that connects itself to various different aspects. We've seen it 100 times. And it makes no actual sense sometimes that, you know, okay, so... It makes no sense in the sense that you're actually driving the spot price below where the physical price is.

And the spot price is what people can [inaudible 00:15:31] just jump in and buy and wait for delivery. And so really, what's happening is then we get these backwardations, where we see that actually, because the algos are based very, very much more in the COMEX market, so... And they're siloed, because you know you don't have any visibility of physical, so what you do is you then connect these algos, "Hey, hang on, dollar's going up, sell gold. Hey, bond yields are going up, sell gold, sell silver." And then of course, they all interrelate, so you've got one index affecting the other. And you get this kinda chaos. And I think that has resulted in these backwardations, which has resulted in delivery demands.

So there's a nice little circle here. And it comes all the way back to what we saw in November, where we think we're gonna see the similar sort of setup here, where you're gonna probably have UBS coming out and threatening people not to take delivery. But then again, you have an arbitrage position, where you'll be quite happy to take a cash settlement, as long as it means that it covers the cost of getting that gold on the spot market at a premium to the COMEX price. So they may be able to protect their game a little longer, but you can't keep affording to lose money as an exchange. And so somebody in this exchange has to be stumping up the money. If you're not delivering the bullion, somebody has to stump up the difference. So, we know, and we've talked about it many a time, Craig. I mean, look, they don't wanna deliver anything off that market. It's not designed to be a delivery market.

Craig: Mm-hmm. Well, it is certainly setting up to be an interesting month, not only for gold this month, but March was interesting for silver. And again, May will be interesting for silver. And we'll see where we go from here. Andy, I wanna be respectful of your time, but ever since we announced you were gonna be the guest this week, we've got a number of questions. I've consolidated them into just three. I might just hit you with them really quick before you go, if that's all right?

Andrew: Of course, of course.

Craig: Well, in your opinion, I mean, again, much of what you do as a day job is in the wholesale market, working with clients, looking for metal in size. You know, we've seen, especially since February, this rush to clean out dealer inventories, great demand for physical silver on the investment side, continued demand on the industrial side, but yet, none of this physical demand seems to be impacting the digital derivative price. Under what circumstances do you think we could finally start to see that trickle through?

Andrew: I think it's the fact that there are people starting to wake up to this game and saying, "Look, if I cannot get the volume I need off the COMEX, then I will turn to the COMEX who, right in front of me, says, 'I have registered inventories you can come and take,' so, 'And look, here's a price. And this is the price you can buy it that.'" And this is what we're running into now for the... This is only the second time that we've seen this kind of Catch-22. I want delivery. We had to up to a $5 and 90 cent backwardation at one point. I mean, it's a no-brainer. If you're a bullion bank, that is a huge profit for you. That's a must. That's what you're in business for. You're in business to make a profit. So of course, you'll lock it in, and you'll hedge it, and use the COMEX to hedge it, and then you'll stand for delivery.

So I think to answer that question, it really is a question of you keep pushing the price of paper too low, then there is a big, a 10 times larger spot market out there, that is actually a global market, that has the right to take delivery. And yes, there's a premium. So if you want anything over three tons, or anything over 100,000 ounces, you start to move into a bilateral deal. You might buy it at spot, and then you'll then further negotiate a price that somebody will sell it to you at. And so that's what I'm saying is there was a $40 premium in one instance in November. What is that premium now, to go out and buy it? And it really, now, depends on how much they can warrant shuffle out of this terrible situation that they put themselves in, by selling too much paper gold, you know, how much can they close? But there is gonna be some that they cannot close. And I think it's really, that volume, we'll know much closer to next week. But I would not be surprised to see another large move up from...very similar to what we saw in November.

Craig: And in even, I guess, basic terms, we just gotta keep up the pressure. We can't let them off the hook. We gotta keep stacking physical metal, take it out of their hands, hold it yourself or at a trusted storage company, like Sprott Money, so that it's not in the bankers' hands, and we can force that deleverage. Andy, the second question comes with, there was a video about a week ago, a guy had emailed The Biz, which is, you know, renowned for being trustworthy and honest. And The Biz said, "Oh no, gold's not a tier one asset. It's not gonna be, but it's more..." I don't want to say nuanced or subtle, but it's more complicated than that. Can you just explain how, in practical terms, gold will soon be, if not currently is, treated as a first-tier asset?

Andrew: Yeah, I know. And I don't blame the people, you know, questioning this. And it's good. I think it's very healthy that people question these kinda things, because it is a smoke and mirrors world here. And [inaudible 00:21:17] as you say is probably the least transparent company out there. They don't talk about their leases, they don't talk about... What they disclose about their leases is very, very small. But essentially, what we're looking at here is I think more importantly, is this gonna be good or bad for gold? And I think, you know, really, what is Basel III? And talking about the first tier aspect, let's nail it right from the beginning. First-tier asset is, every single bank I deal with treats gold as a first-tier asset.

Now, we talked about bail-ins in our "Live from the Vault." And I won't go into the detail of it, we talked about the bail-ins. But we also talked about when a Swiss client goes to the bank to get his restricted to 200,000, 300,000 euros, or Swiss francs, to get their bullion, it's either bullion or it's cash, to that amount, no more, because you're essentially bailing in the rest of their assets. They treat it one-to-one, as cash. So in reality, it's treated by the bank as a first-tier asset. So, now, but what's, I think, the interesting part about Basel III, of course, is that unallocated gold gets an 85% haircut, while conversely, as of June 28th, allocated physical, gets a zero-risk weight, that will apply to bullion held in a bank, or held in another bank on an allocated basis.

So, fairly, what we're saying is, you know, the reason this is so positive, because if unallocated gold continues to be utilized as the funding sources for gold leases, which we just referred to, the onerous financing condition of an 85% haircut is gonna lead to a massive increase in leasing cost. And, you know, we could go through a lot more detail, but essentially, we're talking about a $15 trillion a year gold market here, cleared through the LPMCL in an unallocated, fractionally-held form. And we talk about unallocated all the time, and you've recently been doing articles about it. But essentially, when you think about it, there's about, let's say, in round numbers, 8,000 tons, tons of gold, cleared through the LPMCL every day, when there's, what, 3 to 5 tons of physical actually cleared through the physical market.

So, what does that tell us? What it tells us is... And we do realize that the jewelry industry, the refiners, that you need financing, you need to have some kind of financing in place, nowhere near 8,000 tons. I'm talking about a fraction of that, an absolute fraction of that. So, is it going to be any hindrance on gold when you suddenly see far less paper unallocated gold [inaudible 00:24:26] getting cleared through London, and the [inaudible 00:24:29] to unallocated is gonna shrink rapidly. And so I think we're gonna see a physical price emerge. And we will be seeing gold treated as a first-tier asset, for sure.

Craig: And in the meantime, could it be some... I mean, I'm just trying to summarize, but could it be summarized as, you know, The Biz isn't going to say, or hasn't said on a de facto basis, "Gold is a tier one asset." But on a de jure or practical basis, the banks themselves are treating it as such, even right today?

Andrew: Yeah, absolutely. And of course, you know, they're not going to... What they'll throw in there is that it's also a currency. Well, yes, of course, it is a currency. So, I mean, that's unlike any other commodity. And I think this is part of the smoke and mirrors. You know, it is a currency. It trades as a foreign exchange cross, you know, long dollar, short gold, long gold, short dollar, I mean, so yes, of course. But essentially, that is cash. And so, you know, they're saying gold is cash. So the fact that it receives a zero risk weight if it's held in allocated form for a bank to be able to use as essentially a first-tier asset.

Craig: That's the key. All right, one last question, Andy, because we had a couple people write in about this. I failed to follow up with David Morgan last week. I'm not sure if he misspoke or not, but he said something about thinking that gold was near the end of a 20-year bull market cycle. And I should get back to David and ask him to clear that up, because a lot of folks, myself included, don't see that. We think we're in the early stages of, or a continuing stage of a bull market, based on a number of macro factors. Where do you see us in this, just in general terms, for a bull market?

Andrew: Well, we just talked about a tectonic shift, and the historical shift in the value, way of how gold, physical gold, is gonna be valued. And there is no dispute that it receives a 0% risk rate on June the 28th. And that will be accepted. That's already in place in Switzerland. It's in place in Europe, in Hong Kong, Asia, you know, U.S. So I don't see how gold can be actually be at the end of any kind of a bull cycle here. I think it's just beginning to be revalued. And I think one of the most important things, and again, we kinda covered this a tiny bit in the "Live from the Vault" episode this week. Look, it's all about protecting dollar hegemony. This is what Basel III is about. It's seeking to address massive dollar debasement, and it really is to increase the...what they wanna do is increase the level of gold's collateralization of U.S. foreign obligations.

And we talked about it, like, they're currently about 6%. Historically, they're 20% to 40%. I mean, that essentially puts gold really in the $6,000 to $12,000 range...sorry, the $10,000 to $15,000 range. Ultimately, I see that's where gold will be. So I think no, I would disagree that personally and certainly most of the liquidity providers we talk to are gearing up. And in fact, even you look at the delayed COT report, clearly, the insiders are gearing up for higher prices here.

Craig: Yes. I agree. Andy, one last thing before we go. You've mentioned a couple times this interview you and I recorded for Kinesis two days ago. Just tell everybody quickly where they can find that in case they're curious to hear more.

Andrew: Yeah, it's "Live from the Vault." Hey, I tweeted out, you've tweeted it out. I'm sure everyone that's listening to you also has your Twitter account. It's, you know, or get it, go on the Kinesis Money website and click on it. I think it's been well-received because really, what you and I do is just talk about... We're just freewheeling and we're talking about all our thoughts, the little light bulbs go off, and we, "Hey, you know, this is our insights." And I think, you know, it's of value, I think, to people, especially people who've not been in the business a long time, perhaps.

Craig: That's right. Andy, thank you. I asked for 20 minutes of your time. You've given me almost 30, and that's very generous of you. And I greatly appreciate it. I know everybody has really enjoyed listening. Before you go, and before anyone goes, just please remember to check out sprottmoney.com for great deals on bullion and storage. We've got very competitive storage program rates and international locations. And we have currently a large selection of products as well. So please visit sprottmoney.com for more details. And as we always say, though, just pick up the phone and give us a call too, at 888-861-0775. Andrew Maguire, my old friend, thank you so much for your time. It's been very informative. I hope you have a great weekend.

Andrew: Yeah, it's been a pleasure. And all my best to Eric.

Craig: Hey, thank you. I'll be sure to pass that along. And from all of us here at Sprott Money News and sprottmoney.com, thanks for listening. We'll talk to you again next Friday.

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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