Friday, March 5, 2010

Is a Big Oil Producer in the Middle East Hoovering Gold?

Yesterday, The Gartman Letter contained a comment from a Canadian "friend" who stated that according to his sources: oil producer in [the Middle East] is converting about 200,000 BPD of oil sales into gold bullion - this offtake would equal about 6% of annual gold production...the quiet flight from dollars is accelerating… [and further] Russia bought 25 metric tonnes of gold in January, so 300 T per annum rate which is 45% more than the run rate of Russian gold production. A senior gold mining company operating in China informs us that China is buying all domestic gold production that is not consumed locally.
I can't speak as to the veracity of the report about the ME oil producer, but it's no secret that the Chinese are not exporting any of their gold - the Chinese Government has stated that publicly.  And my chart from yesterday is based on data pulled directly from the website of the Russian Central Bank.  I would argue that it is highly likely that some portion the report about the ME oil producer is true.  I also find it interesting that all is quiet on the IMF gold sale front.  My bet would be that several large "official" buyers are negotiating behind the scenes to purchase that chunk of gold.  As Jim Sinclair has stated many times, usually when an official (i.e. large Central Bank of Govt body like the IMF) entity sells a big chunk of gold, we don't hear about it until after the transaction has already occurred. The last IMF sale to India/Sri Lanka/Mauritius is a perfect example of the golden truth of Sinclair's statement.

Last night I spent over an hour chatting with a long-time precious metals market professional.  This person has been involved in this sector going back to the mid-70's and is very well connected.  I thought that I knew a lot about the world of precious metals but this person's knowledge was quite humbling.  He told me he has several colleagues who travel to Europe almost weekly.  Lately they have been coming back and reporting that the Europeans have become extremely fearful of a global systemic collapse and many wealthy people there are buying as much gold/silver as they can and taking direct possession in order to avoid depository fraud.

Stephen Roach, Chairman of Morgan Stanley Asia, recently remarked that "It is well-documented by economists at SocGen and elsewhere, that the world has now entered a race to the currency bottom." I believe that the accelerating movement wealth out of fiat currencies, and especially out of U.S. dollars, into gold by large buyers is an acknowledgement that a currency crisis involving dollars/euros/yen is right around the corner.  Have a great weekend with that in mind.


  1. Dave,
    I think it makes sense for physical metal holding to be on the rise and I look forward to a paper metal problem very soon.

  2. GYC, it's getting bad out there. I only partially related the conversation I had last night with this long-time precious metals guy. This guy had an unbelievable amount of knowledge and inight. He truly thinks we could have a currency collapse inside of a year. He is telling anyone who listens to buy their gold/silver while they can. He doesn't sell bullion coins, so it's not like he's talking his book. In fact, he's working on getting "off the grid" as much as possible. Like me, he thinks we will see a "Mad Max" scenario.

  3. Dave,
    That seems extreme but when things do go bad they tend to go bad overnight and not in slow motion. I think risk is higher now that at the March lows but you would never know it from whats going on out there.

  4. why do those ME countries bother to convert their oil to gold? isn't it better to leave the oil on the ground? I understand that both gold and oil are better the paper currency. But, I don't see the reason that gold is better.

  5. @anonymous: oil can be viewed as a hedge against the dollar but it's not a currency. gold is a currency. they have to sell oil to create revenues. sell the oil, most of which is settled using dollar, convert the dollars to gold. gold is accepted in more places globally for trade than dollars.

  6. oil will not work as part of an "asset-backed" currency because it is a depletable resource. as such, the pricing of oil will become unstable as it becomes more scarce. almost every ounce of gold ever mined is still in existence. that's part of why it works as a currency anchor.

  7. gyc, study German history in the early-mid 1930's. Jews were warned about what was happening and what was coming and many of them viewed what they were told as "extreme." By the time the real shit hit the fan, it was too late for them to leave Germany. My point is that what may look as extreme right now can easily become reality. When I told people back in 2002 that real estate would lose at least 40% of its value eventually, I was called "extreme." I unloaded my house in Nov 2004 and everyone told me I sold too soon and for too little. I bet if the current owners were to list that house right now, they would be lucky to get 70% of what they paid me and the price decline may only be 1/2 over. you see my point?

  8. In a societal breakdown, don't you think there will be more contention over natural resources like food and water? Gold and silver will be meaningless in a world where the supply chain breaks down (where gas and food does not arrive at its destinations).

    How would food and water be distributed in such a "Mad Max" situation? I see it being skirmishes between cities and towns for resources.

  9. Oil is useful NOW. Gold has been a wealth reserve for over 6000 years. I bet they'll still have their gold well after our oil binge has come to pass.

  10. HighCastle, in the book, "The Road," there's a scene in which the boy and his father find a hidden underground survival bunker. They find food, water, etc. The father also finds a jar with gold krugerrands in it. When they leave the bunker, they take food, water, some tools, but they leave the krugerrands behind.

    The message there is for sure the same one you describe. But it took s nuclear war of some kind to get to that point (at least we believe it was a nuclear event - the author never explicitly reveals the cause of the situation in the story).

    I think if we get to that point at which a currency medium like gold is irrelevant, I probably would not want to survive the events that lead up to that.

  11. Off topic, but I have a question about all these bank failures. Every Friday, FDIC closes three or four banks, but it doesn't mean anything to the depositors. The press releases basically say, "this means nothing to you. You can still use your ATM card, checks, etc. The bank will re-open as a branch of Sunshine Security Bank on Saturday morning. Please continue watching your favorite reality tv show." How much longer can that go on? If I understand correctly, FDIC is already insolvent. At some point, doesn't there have to come a Friday afternoon where they close a few banks and the depositors are told, "sorry, your money is gone. permanently. we apologize for the inconvenience."?

  12. That's a great quesiton I put some thought to last summer...

    The FDIC deficit is another huge white elephant in the room that no one wants to acknowledge is there. As long as the taxpayers tolerate the Government issuing billions and the Fed printing billions to fund the FDIC, it will continue like this.

    People should only leave the amount of money they need to pay bills each month in the bank. The rest should be in a brokerage account and cash and bullion in the vault at home.

    The first thing that should happen when a bank is seized is the senior executives and directors should be put under investigation and held accountable for failed investment decisions.

  13. Dave,

    I posted this at another forum about 5 months ago. It is pure speculation on my part.

    The London Metal Exchange opens for business on Sunday night with little fanfare as several hours of trading elapse normally. Then a huge buy order is placed and delivery is demanded immediately, LME officials panic as they have nowhere near the amount of Gold bought and call a force majeure. Gold begins to rise in uncontrollable fashion.

    As NY opens for trading, Gold is over $1500 and rising as the USD falls through 70 and gains a 60 handle. Greed then turns to fear and the equity markets crash through all 3 circuit breakers and close early, down over 5,000 points for the day. The masses then panic, bank runs ensue and all banks are closed throughout the nation. A statement is released, they will not re-open until an investigation is completed.

    The masses sit in stunned silence and the brown stuff runs down pant legs. Even those that know this is coming experience shock and awe. Obama calls a press conference that has the highest rated audience in the history of TV and calls for calm, saying we will get through this. He and his minions then jet off overseas for emergency talks. The muckers and drooling zombies come out in droves as the media starts to crack up, on-air, covering this chaos.

    Survival is game on from this point forward.

  14. That's certainly one possible way in which the final chapter of the Anglo/American fiat currency saga could start off...But in your scenario, by the time we wake up on Monday morning, gold will be over $2000/oz and silver will be over $100.