Trump to inspect the Treasury’s gold

It will prove difficult for the US Treasury to deflect Trump from opening its gold book, since Elon Musk and Ron Paul appear to be driving the move to come clean over national gold reserves. 

Gold and silver continued to rise this week, despite the premiums on Comex futures returning to more normal levels, putting an end to arbitrage flows. In European morning trade, gold was $2927, up $46 from last Friday’s close, and silver $32.92, up 81 cents. Turnover in Comex’s gold contract was moderate, but healthier in silver.

Notably, Comex Open Interest in gold declined significantly during the market’s hiatus, shown in the next chart.

At its recent peak on 21 January, gold was $2735. Since then, OI declined, while the price rose $200. This can only have happened due to a vicious bear squeeze, panicking the shorts who are predominantly in the Swaps category. Swaps are made up mainly of bullion bank trading desks. 

The next chart shows the mark-to-market position of the swaps up to 11 February, the last Commitment of Traders release:

At over $80bn gross and $75bn net of longs, the panic point has been exposed. The latest numbers are a tad below the highs of 2 February, but higher prices could intensify the bear squeeze. 

The textbooks say that Comex is a hedging facility, whereby bullion banks long of physical gold in London’s spot market hedge price risk by selling futures. But it is more complex than that, because London is itself a derivatives market based on future settlement dates which rarely lead to actual settlement. Furthermore, there is the shell game of London being an over-the-counter market whose participants do not reveal other obligations, principally unallocated bullion accounts. And this monumental turnover of 20 million ounces every day is based on leases and swaps which are temporary ownership of bullion for collateral.

All this is fine when gold prices range-trade. But when there is a significant change in the price basis, big losses become exposed with heightened risks of systemic failures.

No doubt, the other side of the squeeze is the mounting problem of stand-for-deliveries. All the evidence is that the shorts are extremely reluctant to deliver bullion using delaying tactics. It leads to an accumulation of unsatisfied demands. The rate of increase of these demands has accelerated fourfold since last year’s total of 491.2 tonnes. So far this year, from 1 January the total to yesterday was 291.4 tonnes, an annualised rate of over 2,000 tonnes. 

With gold in the headlines President Trump has announced that he will “count the bullion in Fort Knox to see if it is there”. Scott Bessent has said he wants to set up a new sovereign wealth fund, putting all the Treasury’s gold into it. But everyone knows or think they know that much of it is missing. And Fort Knox has only half the Treasury’s holdings, the rest split between West Point and Denver.

It is a reasonable assumption that the Treasury has something to hide, otherwise it should have been prepared to conduct credible audits. Normally, it manages to deflect this issue. But Trump’s involvement, and particularly that of Musk and Ron Paul will make it extremely difficult for them to do so.

If Musk and Paul manage to expose the true position and that there is missing bullion, it is likely to be the thin edge of a wedge exposing shortfalls in other central bank holdings arising from non-return of leased gold going back decades. Have no doubt that the Treasury will take the view that this must be stopped in the interests of global monetary stability.

If this story gets legs, it could drive gold significantly higher.