THE PHYSICALS MARKET
Gold is breaking out after forming a 6-year base. But, the true price of gold is much higher than the spot price quoted in the paper market. Shortages are driving the price of physical gold sky-high.
The soaring price is propelled by HUGE supply-deficits in New York and London of “Good Delivery” bullion (100-oz & 400-oz bars).
The gold price is not the price of gold. Product shortages are now driving up the real price of gold in the physicals market. Today, large buyers want actual bullion, not promissory pieces of paper.
THE PAPER MARKET
In the West, few investors own PHYSICAL gold. Most people prefer the ease of buying and selling precious metals in the form of derivatives: ETFs (Exchange Traded Funds), swaps, options & commodities futures contracts.
Large flows of money into these highly-leveraged instruments establish prices. However, the fractional reserves underlying their value are now depleted. Since 2008, the Eastern Hemisphere has been vacuuming up “Good Delivery” gold and silver from the exchanges.
Today, there is little connection between the meager stocks of unencumbered bars (deliverable bars*) vaulted in bullion bank warehouses and the enormous “short” positions held by the banks.
THE PAPER PONZI SCHEME**
Most bullion traded in this market is mere PAPER.
Unlimited supplies enable unlimited short-selling.
Prices are determined by banks’ synthetic positions.
According to trading data from the LBMA (London Bullion Market Association), Scotiabank, UBS (Union Bank of Switzerland), ICBC Standard Bank (Industrial & Commercial Bank China), HSBC (HongKong & Shanghai Banking Corp), & JPMorgan predominantly trade PAPER gold (“synthetic positions”), rather than PHYSICAL gold.
Over-the-counter markets in London and Zürich alone trade more than 940 tons of gold PER DAY. Yet, global mine production increases the gold supply by only 2,500 to 3,000 tons PER YEAR. This means more gold is traded in Europe every 3-4 days than is mined worldwide in 1 yr.
How is it possible?
The exchanges rarely deliver PHYSICAL bars.
The vast majority of accounts are settled with cash.
Banks have an unlimited supply of synthetic bullion.
2011 Bullion Bank Run
PAPER short-sellers can usually keep a lid on prices. The last time the pricing mechanism for precious metals was controlled by PHYSICAL FUNDAMENTALS was in 2011.
That summer, major mints in Canada, Austria, Perth, South Africa and the U.S. completely ran out of gold. Silver supplies were just as tight. For six to eight weeks, dealers across the nation were unable to satisfy over-the-counter demands. Dealers went “Bid only” — “No offer.”
HISTORY OF THE RUN ON PHYSICAL SILVER
Silver rose from $6.40 [Jan. 2005] to $9 [Jan. 2006] to $13 [Jan. 2007] to $15 [Jan. 2008]. On April 28, 2011, silver hit $49.82/oz.
HISTORY OF THE RUN ON PHYSICAL GOLD
The year before the global credit-collapse, gold was $525/oz [Jan.5, 2006]. The day credit FROZE worldwide, gold was $662.60/oz [Aug. 9, 2007]. On March 14, 2008, gold surged past $1,000/oz for the first time ever. At year-end in 2010, gold was $1,180/oz. Acute shortages drove that run-on-gold to $1,903.30/oz [Aug. 22, 2011].
SUPPLY & DEMAND
The next run on physicals will dwarf the last, worldwide run. Even now, the exchanges in London and New York are short of bars “eligible for delivery.”*
Due to extreme product shortages, palladium is already going crazy (with unprecedented price-swings of $1,000 per oz within only a few weeks)!
Acquire U.S. silver coins before the PAPER
market loses its grip on the price of silver.
PHYSICAL gold & silver eliminate counter-party risk. Get silver dollars (old & new) and 24k Canadian Maple Leafs. Take delivery while coins are readily available.
Gold’s rise is just getting started. On the upside, there will be little resistance for a long, long way.
Submitted by Denise Rhyne
* “REHYPOTHECATION is the practice of using the assets held as collateral for one client in transactions for another. This allows the prime broker to re-lend client securities (or gold) held as collateral… Collateral is used by investment banks for their own purposes” (Financial Times Lexicon).
“Encumbered” fractional-reserves have been “rehypothecated“ − lent, leased, swapped, shipped, sold, resold (the same bars sold to multiple owners), or pledged as collateral multiple times.
** NAKED SHORTING is a trading technique used whenever metals break to the upside. Prices are brought down by massive, concentrated sales of PAPER gold or PAPER silver. Contracts representing millions of ounces are dumped simultaneously on exchanges.
Short-sales are “naked” when sellers do not insure that the bullion can be borrowed or secured prior to sales. If sellers do not have the gold or silver to fill the contracts (if bullion is unavailable), the corresponding half of the transactions cannot be fulfilled.
Washington Gold Exchange LLC
Craig Rhyne offers personalized service and competitive prices. Call (206) 719-6368. See our Model Precious Metals Portfolios.
INFLATION: “An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices. The rise in prices is caused by an increase in the volume of paper money issued.” Webster’s Twentieth Century Dictionary, George Ogilvie, USA, 1904.
Stein’s Law: If something cannot go on forever, it will stop. “Cry Wolf” video by Grant Williams (this “fiat” experiment will end):