About Delivery Ratio and Cover Ratio at the COMEX

Interesting article by Jan Skoyles.
http://therealasset.co.uk/comex-2-paper-gold/

The summary says to us that the amount of gold bullion backing COMEX obligations is at an all time low (Cover Ratio). Meaning, there is very little gold backing at the COMEX.

If the delivery ratio (amount of delivered gold against contracts) ever spikes upwards, the COMEX could get under stress. Today, we are still fine, because people aren't really taking delivery as much as they should be.

Also notable is that registered stock is declining at a much faster pace than open interest (which is actually still very high). Such things cannot last, as this huge amount of leverage will blow up one day. You just can't trade contracts at this level without any physical backing of gold.

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Correlation: Gold/Silver Ratio Vs. S&P

Zero Hedge thaught us another correlation. The Gold/Silver Ratio actually has a meaning.

When the ratio goes up, gold goes up more than silver, which means fear is growing. In that environment, the stock market declines. Conversely, when the gold/silver ratio declines, silver is stronger than gold, which means fear is going away and the risk-on trade is prevalent.

Another way to look at it is: when stock markets plunge, silver won't do well.

Chart 1: Gold/Silver Ratio Vs. S&P

So we have yet another tool to predict the stock markets. Just keep it in mind.

You can monitor the Gold/Silver ratio here:
http://stockcharts.com/freecharts/gallery.html?s=%24GOLD%3A%24SILVER

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Deficit to Outlay Ratio

This page is created to monitor the U.S. Deficit to Outlay Ratio.

It measures how much of the government spending (outlays), comes from borrowing of foreign money (deficit).

A deficit to outlay ratio above 40% indicates that there is a high probability of hyperinflation.

Today (2013) we have an unprecedented deficit to outlay ratio of 30%.

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Dow Gold Ratio

This page is created to monitor the Dow-Gold Ratio.

Whenever the Dow-Gold Ratio increases, the economy is booming. Whenever the Dow-Gold Ratio decreases, we enter a recession/depression era.

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U.S. Deficit Spikes

As December and January were pretty good months (no deficit), February 2013 marked a record deficit of $204 billion. The deficit to outlay ratio spiked to 60%, way over the hyperinflation ceiling of 40%.

If the U.S. keeps going at this rate, we will see $2 trillion dollars in deficit soon.

Chart 1: Deficit to Outlay Ratio

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Correlation: P/E ratio Vs. Bond Yields

A few months ago I said that the P/E ratio would go up when bond yields go down. Apparently today, I read on Zerohedge that it is not black and white. This is only true for yields above 3%.

When we go lower than 3%, the correlation reverses. This is very interesting...

Chart 1: Yields Vs. P/E Ratio

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No U.S. Deficit in December 2012

The U.S. has done a good job in the month of December 2012. Its outlays of $270 billion were fully absorbed by receipts of $270 billion which makes the December 2012 deficit zero (Chart 1).

I think most of this is due to the fact that the debt ceiling was reached in December, so the U.S. couldn't spend as much money as it could.

Chart 1: Deficit to Outlay Ratio U.S.

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Dow Gold Ratio closing down

A little reminder on the Dow-gold ratio (Chart 1). We see that the Dow has underperformed gold recently. And it looks like the trend could keep going down, which is consistent with my bullish view on precious metals.

Chart 1: Dow Gold Ratio

Also very consistent with my bullish view on silver, we see the gold silver ratio (Chart 2) go down as well. It's strikingly similar with the Dow-gold ratio.

Chart 2: Gold Silver Ratio

And finally, we see that platinum hasn't had its rise yet against gold. So buying platinum is still a very good deal (Chart 3).

Chart 3: Platinum Gold Ratio

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The Status on Silver

This article is a summary on the most recent developments in the silver market. I will talk about the silver technicals, silver-gold ratio, silver investment, silver depletion, silver long/short positions and silver warehouse stock.

Let's start with the technicals. A pretty concerning picture for silver can be witnessed on the gold-silver ratio chart (Chart 1). You can see that in mid 2010, silver started to outperform gold until mid 2011. During that period, silver went from $US 18/ounce to $US 50/ounce (Chart 2). But recently, the silver price underperformed the gold price, with the gold-silver ratio going back to 60.

Chart 1: Gold - Silver Ratio

Chart 2: Silver Price

However, based on historical gold-silver ratios, we could go back to a 16:1 ratio as the trend in the gold-silver ratio is downwards (chart 3). We already had a second peak in 1992 at gold-silver ratio of 94 and we will go back to the low of 16.

Chart 3: Long Term Gold - Silver Ratio

Last year, silver had been doing well, going to $US 50/ounce and a gold-silver ratio of 30. Recently, we saw a correction in the gold-silver ratio back to 60. I believe that correction is over and many other investors including Eric Sprott acknowledge this. We're approaching a key technical point of a wedge pattern. Either we'll get a huge move to the upside or we get a huge move to the downside. I believe we'll see upside and we already see evidence of this. Just recently, the Sprott Physical Silver Trust priced in a follow-on offering of silver trust units in an amount of $US 200 million.

The fundamentals of silver are getting better and better every day. Concerning the depletion of silver, the New Scientist forecasted in 2005 that silver would be depleted in about 15-20 years. This means today we have only 10 years of silver left. Unlike gold, silver is being consumed as it is used in many applications. After consumption, the silver will be thrown together with its applications into land fills and will never be recovered. You could argue that silver can be recycled, but studies have shown that the recycling of silver is not feasible below a price of $US 50/ounce.

Silver scrap is a very important factor in supplying the silver to the markets because it comprises 22% of total silver supply. Since year 2000, the silver scrap to silver supply ratio has been steadily declining. Only just recently in 2011 we saw a spike in the silver scrap to silver supply ratio to 24.7% (Chart 4). This spike is due to the record high price of silver in 2011 ($US 50/ounce), which spurred investors to recycle jewelry and silverware. I expect this number to come down in 2012 as the silver price has been correcting.

Chart 4: Silver Scrap to Silver Supply ratio

Events like the offering of the Sprott Physical Silver Trust add to the velocity of depletion as investment demand will take silver supply out of the market. Manipulation of bullion banks to decrease the silver price only adds to the demand of investors to buy silver. We see this in the Silver Institute's 2011 report on silver demand/supply. The demand for silver coins went up an astonishing 18%.

On the net short positions of silver I want to make clear to investors that we are approaching a decade low in the Large Commercial Net Short positions (LCNS). Historically, when LCNS goes up, the price of silver goes with it. Basically this means that a huge spike to the upside is imminent.

Chart 5: LCNS silver

On the COMEX silver front we note that registered silver went up from 29.0 million troy ounce (25 April 2012) to 38.7 million troy ounce today, indicating that physical silver has been stocked in COMEX warehouses. Total silver inventories rose from 140.6 million troy ounces (25 April 2012) to 144.4 million troy ounces today (Chart 6). Rising stocks typically mean that there is less demand for silver, declining stocks typically mean there is more demand for silver. On chart 6 we see that stocks had been slowly rising in the previous months (less demand), but more recently, the stock has been declining again since the start of July 2012. Demand is picking up again due to seasonal strength in precious metals (month of July).

Chart 6: COMEX silver stock

On the more fundamental side of the economy we noted a very interesting event in the deposit facility of the ECB. Overnight deposits declined by more than half due to the ECB deposit rate cut. This 500 billion euro will basically find its way somewhere, possibly in the precious metals market.

Conclusion: It should be a very good time to invest in silver.

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The Status on China

We already know China is slowing down, because their imports of key commodities have been going down lately. I summarized this already in this article. We saw that industrial commodity imports were declining, while gold imports and U.S. treasury buying skyrocketed. I believe China has enough tools to keep their real estate and stock markets from falling. To find out how, go to my analysis here.

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Status on the Dow-Gold Ratio

Gold has been doing miserably on negative news in Europe. As a result the Dow/Gold ratio has been going up since Europe has been implementing LTRO I and LTRO II late 2011. I believe we will have support now at Dow/Gold ratio of 9 and it could be time to sell the Dow and buy gold (Chart 1).

In this article I go deeper into the "China play" on this gold dip.

Chart 1: Dow Gold Ratio Short Term

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