Andrew Maguire: “ Institutional money is flowing into allocated physical gold globally, and this is changing the dynamics. The usual synthetic market wash-and-rinse cycle is breaking down as its drivers are anchored upon a fractional reserve unallocated bullion market structure, which is the equivalent of a Ponzi scheme.

What this is telling us is that the price drivers are now coming from the physical markets. Whereas up until now it has been Comex speculators that have heavily influenced global prices, this is now changing. The Comex tail wagging the much larger spot or physical market dog’s days are over.

So what we are seeing are the synthetic gold markets giving way to a fundamentally driven global physical market, and fundamentals dictate much higher prices to come.

Physical Gold Mrket Leaving London

To explain this a bit better, let’s first take a quick look at the market structure. Comex is a trading tool, but clearly a non-delivery market, so not an investment tool. To add provenance to this fact one only has to compare delivery volumes on the Shanghai Gold Exchange (SGE) vs the Comex. SGE weekly physical withdrawals averaged 49 tonnes per week throughout 2015, but the entire "annual" Comex deliveries barely exceed one week of the SGE’s offtake.

In addition, more than 95% of gold traded on the LBMA is ‘unallocated gold,’ which is paper gold settled by way of a debits or credits in the respective LBMA member banks metal accounts. The holders of these accounts are merely unsecured creditors of the bank with general claims on an unspecified volume of gold in the bank’s vault.

Therein lies the problem for the Western central banks. Before the physical markets started to migrate to Asia, it was possible to keep rolling over forwards and derivative positions because of the fact that unallocated account holders were not choosing to allocate. This created a vast amount of synthetic gold supply, which had the effect of diluting the real gold price.

Central Planners Have Finally Lost Control of the Gold Market

The current unwind of unallocated high counterparty risk accounts seeking the safe haven of allocated physical gold off loco London has created a market disconnect never seen before. One thing that becomes clear is that current gold price is significantly below fair value. We will see pullbacks and consolidations, particularly in light of gold being so overbought, but the trading action reveals that Western central planners have finally lost control of the gold market.”