Monday, January 25, 2010

How Long Before the Demand for Physical Gold Blows Through the Paper Supply?

A massive disconnect is developing between the paper gold market (futures/OTC derivatives) and the physical gold market.  There have been reports from London for several months now of delivery problems and tightness of supply in the physical market.  Evidence of this is observed by the persisently high premiums which have been occurring throughout the various Asian markets (India, China, Viet Nam) for several months now.  There also have been several accountings of delivery problems/delays in London and NY.  Furthermore, the U.S. Mint suspended production of gold/silver eagles several times during 2009 because of a shortage of the gold/silver blanks used to mint the coins.

I wanted to post this excerpt from tonight's Midas report (, which is excerpted from Jim Willie's latest Hat Trick Letter LINK.   Willie's source, a London banker, describes the depleting supply of gold on the London Metals Exchange.  We know that China announced earlier this year that they were going to move their gold from London and other locations to a new depository facility in Hong Kong. This is probably contributing to the tight supply in London as described below by Willie's insider contact:

"During the trend decline or the counter rally for the USDollar, a constant event persists. The London metal inventory is being totally depleted of gold bullion. Fast approaching is the event of GAME OVER for London, a condition that has already reached critical level according to a key reliable source of information with London connections and direct experience there. The paper gold market and the physical gold bullion market have finally separated in a practical manner, meaning actual gold has almost no role anymore in London paper contract settlement. The absence of gold in London requires extraordinary tactics to settle contracts and to obtain gold bullion. Intimidation and bribes accompany gold delivery demands. They have almost zero gold, its supply having been drained in high volumes since early December, a process currently in acceleration. The opportunity to convert fiat money into precious metal weight is closing, at least at prices considered reasonable. The London gold banker [Willie's source] said, "There is going on a lot more than meets the eye. The physical system is actually consolidating bigtime and is organizing itself with lightning speed, totally hidden from pretty much anyone, even the so-called insiders. The paper precious metal market and the physical precious metal market have defacto disconnected. The paper and physical gold markets currently operate in parallel universes. The outflow of physical metal from bank vaults is happening at a mind bending pace." The true gold price might very soon become unknown, an extremely positive development. Gold market disruption leads to chaos, followed by much greater clarity. Like a bankruptcy process, the event is sudden but the cleanup takes weeks as dust settles. Right now, we see strong attempts using naked gold short contracts at the London metals exchange (LBMA) and the COMEX in the United States to drive down the gold price. It is all illegal and permitted. Margin calls have hit, forcing further selling of paper contracts. Before long, no gold metal will be available until clarity and prosecutions begin."

The "clarity" as described above refers to the process of establishing bona fide price discovery in the physical gold market.  For at least the last 15 years, the price of gold has been set by the highly manipulated paper markets in New York and London.  As physical supply becomes scarce at current price levels, we are transitioning into a market in which the real price is defined by the price level at which a large seller of physical is willing to sell to a large buyer.  India's 200 ton purchase from the IMF established the low end of this range at $1049.  As of now, the IMF is the only entity that visibly has a big chunk of gold for sale.  And we know both India and China have expressed interest in acquiring all of the IMF gold, not just the announced 403 tons for sale.  Assuming the IMF - in the spirit of maximizing sales proceeds - isn't waiting to see if the price goes lower before it sells more, it's safe to assume the rest of the IMF gold for sale won't change hands until the price of gold is at least as high as the recent all-time high of $1220, otherwise it would have sold the rest around that level to either China or India.  If the information from Jim Willie's insider source in London is accurate, it is reasonable to assume that we will see a much higher trading range for the price of gold in the near future, as the market will have to adjust to a higher price level as a mechanism of price discovery in order to "discover" the price at which a large seller is willing to sell.


  1. Dave how in God's good name can the usd rally, and people sell gold when I keep reading headlines like these, [Defecit to hit 1.35T in 2010 CBO says, Growth to stay muted...] from Marketwatch today.

  2. anliu, i think a lot of it is largely black box/algorithmic trading fueled by central bank intervention. I also think there are lot of mainstream dopes who believe that the U.S. is relatively more stable than EU/Japan.

    For sure, the U.S. is in much worse fiscal shape when you consider public and private debt in aggregate PLUS the expected amount of deficit spending going forward.

  3. Dave can't this usd ponzi scheme go on as long as the central banks of the world play along? I mean whats stopping the fed from pressing the delete button on the digi dollars that come home to roost? U sort of see what I mean??

  4. The world already is starting to reject the dollar. Look at how many big central banks have announced reserve "diversification" programs.

    The Fed can't just "erase" electronic dollars because most of those dollars have an accounting offset which is some form of debt-created note. If the whole world is willing to give the U.S. a "do over" and just forgive all that debt, for sure the Fed can destroy the related dollars. But what are the odds of that happening?

    The more likely scenario is that the ongoing devaluation of the dollar (lost 80% since 1971 and you can find that number on the Fed website somewhere) will start to accelerate until we get to the point of an overt devaluation. Things will be really ugly at that point.

  5. Speaking of CB "diversification" programs, Russia and China have said this past few weeks they are buying the CAD dollar and other Canadian assets and the said currency falls... Go figure!

  6. i live in canada and we are in a glass ball...similar to the US a few years ago just before real estate started to crash and then the stock market.
    the wealth affect is in full force in canada because of real estate prices.

    Are Canadians rubes?

    When it comes to figuring out what to spend our money on, apparently. Let’s do a little comparison with our American neighbours – you know, those subprimates we’re always dissing as being trailer park while we’re so smart.

    US family income, on average, is $67,348. Canadian family income (in US dollars) is $68,305. Almost a dead heat there.

    Household debt as a percentage of disposable income is 132% in America and 145% here. Whoops, we lose that one, but not by much. We’re all spending beyond our means.

    Retirement savings in the US, as measured by the average 401k plan, is $62,900. In Canada, the average RRSP balance seems to be about $64,000, or $60,800 in US dollars – about the same.

    Mortgage rates are, hmmm, similar. In the States a short-term home loan is 3.7%, while here is it 2.65%. But the Americans have the edge in being able to lock in a 30-year mortgage at 5.14%, while we have to renew at market rates every 5 or 7 years.

    But what’s a very similar comparison breaks down entirely when it gets to real estate. The average US resale home costs $178,000. In Canada, the national average right now is $337,410, or in US dollars $300,294.