GLD Drain Accelerates Again

The GLD is once again being drained of "inventory" during a period of rising prices. Is this a sign of tight, global supply? Unfortunately, we can only speculate.

As we've diligently established over the past eight months, the paper price of gold is now largely controlled by daily changes to the dollar-yen. HFT trading algorithms now control nearly every "market" and, within paper gold, it appears that most HFTs are set to sell gold as the yen declines versus the dollar and buy gold as the yen appreciates.

Here's the past three years of correlation, with the yen in candles and gold in bars:

And here's just the past 12 months:

However, there's a period within that 12-month chart where the correlation clearly broke, roughly between 11/5/14 and 12/1/14. After that, the correlation resumed. I've added arrows to the chart so that you can see what I mean (click to enlarge):

And what was occurring then to break the correlation? Recall that over the exact same time period, the now-discontinued London GOFO rates moved into extreme and historic negativity. The snapshot below shows 1-month, 2-month, 3-month and 6-month GOFO rates between 11/4/14 and 12/5/15. Note several things:

The sharp acceleration of negative rates began on November 5
Negativity peaked on December 1 as even the 6-month rate was at an all-time, historic low of -0.12333%
All negativity then evaporated by December 5

Combining this chart analysis with the GOFO rates led me to the following conclusion:

The paper--physical connection nearly "broke" last November. The HFT trading programs that linked the gold price to the value of the falling yen had driven price uneconomically low and the result was a dramatic shortage of readily-deliverable gold in London. This yielded a price "floor" near 50 that still holds as support to this day, despite several attempts to crack price below there in the time since.

However, in January the LBMA conveniently (for them) decided to discontinue the publication of daily GOFO rates. Clearly this tool had become too useful for all of us who seek to peer into the deliberately-opaque London process. So, after years of daily updates, the LBMA decided to simply quit publishing the rates. So, how can we decipher whether or not tightness exists in the wholesale gold market without the GOFO rates? That's the puzzle...and maybe we have a partial answer.

The raiding and pillaging of the sham GLD for physical metal has been documented many times on this site. Here are just a few examples:

However, this pillaging doesn't just occur during periods of falling price, it occurs during periods of rising price, too. One such period was the algo-disconnect discussed above, between 11/5/14 and 12/1/14, when GOFO rates went historically negative.

Over that same time period, and while price was rising from a close of just $1147 on 11/5/14 to a close of $1219 on 12/1/14, the total stated "inventory" of the GLD fell by 21.19 metric tonnes from 738.82 mts to 717.63 mts. "Inventory" began to rebound in early December before falling once again and finishing 2014 at just 710.81 mts.

So, to summarize the GLD changes, as price rose $72 or 6.3% during that 4-week period in November of last year, the GLD shed 21.19 mts or roughly 2.9% of "inventory". Were the Authorized Participant (Bullion) Banks raiding the GLD in a desperate attempt to confiscate any available metal in order to meet global demand in a time of extreme physical tightness? Well, you could very easily come to that conclusion, couldn't you?

Again, though, how do we assess physical tightness going forward since the LBMA decided to stop letting us see the the GOFO rates? Can the GLD alone provide the answer? No, it can't. However, it may still be able to provide some clues. Let's take the current GLD "inventory" activity into consideration.

As the month of May began, the paper price of gold stood at $1174. Once again, this was very close to the "physical floor" we identified back in early November. Over the next two weeks, gold rose by 4.6%, closing at $1228 yesterday. Over this same time period, the GLD "inventory" has once again fallen sharply, from 741.75 mts on 5/1 to just 718.24 mts last evening....including a 5.67 metric ton puke-job just yesterday.

So, again and just like last November, price rose dramatically while the GLD "inventory" fell by 23.51 mts or 3.2%.

Hmmmmm. Did we just witness another physical demand-induced price squeeze? Again, it's impossible to confirm given that the LBMA no longer publishes GOFO. However, we'll continue to monitor the daily changes to the GLD "inventory", particularly if price begins to decline again toward that $1150-$1180 range. In the absence of free information from the LBMA, monitoring the GLD may be one of only public indicators left in measuring global gold supply stress.