Lukester
08-17-08, 03:36 PM
A Fabrication Bottleneck or Something More?
(James Turk - GoldMoney)
The Internet is abuzz with reports that precious metal dealers have stopped selling coins and small bars because they have run out of inventory.
For example, Franklin Sanders reports on goldprice.org (http://goldprice.org/silver-and-gold-prices/) that his inability to purchase product from his suppliers is something that he has never seen before in his "twenty-eight years of brokering silver and gold." On Friday afternoon, Kitco (http://www.kitco.com/) posted the following notice: "Due to market volatility and higher demand in the entire industry, we are anticipating delays in supply of all bullion products."
The rush out of fiat currency and into precious metals on this latest drop in prices is not just a North American phenomenon. The Times of India (http://timesofindia.indiatimes.com/Hyderabad/Gold_glitters_again_for_buyers/articleshow/3369855.cms) reports: "There is a shortage of the yellow metal in the bullion banks and traders."
The bottom line is that it is difficult, if not impossible, to buy coins and small bars. Mints and refiners are back-ordered. Dealer shelves are bare. But the question is, why? Is it just a fabrication bottleneck, or is something else happening?
When I see or hear that store "shelves are bare", my first reaction is that government price controls have been imposed. Price controls always create shortages. But there are no price controls on the precious metals - at least not yet anyway. So absent price controls, the answer to dealer shortages is simply that the price of gold and silver is just too cheap.
To explain this point, there are two different gold markets - the physical market where real bullion is exchanged between hands. And the paper market, where people buy and sell pieces of paper purportedly backed by gold, much of which is highly leveraged. The selling carnage in the paper market from over-leveraged hedge funds has created a buying frenzy by retail investors for fabricated product in the physical market, with many dealers reporting that they have sold out and cannot get their hands on coins and small bars, particularly silver.
In other words, there is presently a huge disconnect between the paper market and the physical market. The demand for physical metal is soaring.
Normally the market is supplied by new material being fabricated and existing products being sold back into the market, but no old products are being sold. In contrast to the paper market where over-leveraged positions have caused distressed and forced selling, existing fabricated product is in strong hands, and unlikely to be dislodged except at much higher prices.
I suspect that this disconnect between the paper market and the physical market means that gold will climb back as rapidly as it fell, creating a "V" bottom. Consequently, the precious metals are likely to snap back as rapidly as they dropped. After all, inflation is a growing problem everywhere, the US federal deficit is ballooning, the global banking system is imploding from losses, inflation-adjusted interest rates in every major currency remain negative, and the euro is reeling because of massive current account gaps in Spain, Portugal and Greece. All of these factors are very gold bullish.
To give you a true picture of just how bad inflation has become, here is what John Williams of Shadow Government Statistics reports in his latest newsletter (http://www.shadowstats.com/): "The SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to a 28-year high of roughly 13.4% in July, up from 12.6% in June." It's no wonder that the demand for precious metal coins and small bars is so strong.
Incidentally, though GoldMoney - like many other companies - had a record week, GoldMoney has not experienced any shortages of metal because we transact only in large bars, namely, those that meet the standards of the London Bullion Market Association (LBMA). These bars come into the market daily from refiners and existing stocks, such as those held by central banks. But the shortage of fabricated product has caused me to ponder whether a shortage of LBMA-sized bars might also develop at these low prices.
In other words, could gold go into backwardation, meaning the spot month (i.e., physical metal) trades at a premium to future months (i.e., paper promises to pay metal in the future)? A backwardation would be unthinkable in normal times, but these are not normal times.
The extraordinary demand for coins and small bars can be viewed as an early sign that the market is moving into backwardation. In other words, the backwardation is in effect being reflected by higher premiums above spot for physical metal, rather than spot itself rising and going into backwardation.
Central banks do not transact in small bars and their coin transactions are inconsequential compared to the size of the market.
So the market for fabricated product is relatively free from government influence. But central banks of course exert a dominant influence on the market for LBMA-sized bars by using their existing gold stocks, and they can keep the spot price for gold (which is determined by the buying/selling of LBMA-sized bars) artificially low by dishoarding gold from their vaults.
So my thought is that if gold does not climb back above at least $900 quickly, a shortage of LBMA-sized bars will develop unless central banks allow their vaults to be cleaned out, much like Ft. Knox was drained in the weeks leading up to the 2-tiered London gold price created in March 1968, with an official price at $35 per ounce and a free-market price well above that level. If central banks allow their vaults to be cleaned out at these current low prices, then look for some contrived government imposed dictum on the gold market, just like they did in March 1968. Price controls would be one possible dictum.
To conclude, the present situation reminds me of August 1976, just weeks before the Democratic Convention confirmed Jimmy Carter as that party's presidential candidate. Gold slid down to $100 per ounce even as the inflation and economic outlooks were worsening. Gold looked dirt-cheap back then even though its price had risen three-fold from just a few years before.
By the end of 1976, gold had climbed 32.3% from its August low. By the end of Carter's presidency four years later, gold climbed more than eight-fold. I wonder where gold will be at the end of the next president's first term in office?
Lastly, I append current charts of gold and silver in terms of US dollars and euros. These charts put this week's big price drops into perspective. In short, we've seen drops like this before in this bull market.
Importantly, the precious metals remain within the clear uptrends delineated on the following charts. For the past twelve months ending Friday, August 15th, gold is up 17.5% and 7.8% against the US dollar and euro respectively. Silver, however, during the past twelve months is down -6.2% against the euro, but up 2.3% against the US dollar. And while silver's performance may look bad, it is worthwhile keeping in mind that the Dow Jones Industrial Average during this same period is down -9.3%.
http://goldmoney.com/en/images/commentary-images/commentary-charts/alert_2008-08-17a.jpg
http://goldmoney.com/en/images/commentary-images/commentary-charts/alert_2008-08-17b.jpg
http://goldmoney.com/en/images/commentary-images/commentary-charts/alert_2008-08-17c.jpg
http://goldmoney.com/en/images/commentary-images/commentary-charts/alert_2008-08-17d.jpg
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Lukester
08-19-08, 02:18 AM
MORE ON THE PRECIOUS METALS PRICE "CONUNDRUM"
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The Disconnect Between Supply & Demand in Gold & Silver Markets
James Conrad (Seeking Alpha - August 18th 2008)
There is a huge demand for both gold and silver right now in India and North America. North American shops are completely bare of silver. Indian shops are empty of both silver and gold. Even the Indian banks don't have any gold or silver. The big western bullion banks, based in New York and London, control both the gold and silver trade. Reports from India are that they are refusing to extend Indian bank lines of credit, forcing the small banks to deliver to clients, collect money, and pay down lines of credit, before being allowed to take delivery of another gold or silver shipment. This is very abnormal. Normally, if a banker’s bank knows that its customer-bank has firm orders, it would extend the smaller bank a bigger line of credit. Not now.
By refusing to extend lines of credit, the big bullion banks are essentially rationing a very thin supply. Most physical silver, for example, is being reserved for industrial and fabrication use, and investors are simply not able to get any, without waiting for months. Investor oriented shops are bare, and the U.S. Mint has suspended coin production. All available supply seems to be reserved for industrial users. You cannot substitute paper claims for real silver, in industrial use, because paper doesn’t have the physical properties of silver. So, it seems that all available supply is being diverted to industrial users, and, to a lesser extent, aside from the squeeze on lines of credit, also to jewelry fabricators. But, investors are left out in the cold. They can accept paper claims, or nothing. The most interesting mistake that the manipulators have made is in not supplying the U.S. Mint, which has run out of silver, proving that there is a severe shortage.
Meanwhile, by refusing to extend Indian bank lines of credit, Indian jewelry demand for both gold and silver is being stymied. India is not being allowed to drain away precious metals, in the amounts that are warranted, given the low prices and the numbers of unfilled orders that are sitting on desks in India. World bullion banks, in other words, are managing deliveries of physical gold and silver to artificially reduce the quantities delivered, under the excuse that the “Indians have run down their credit lines.”
The happiest fact of bullion bankers’ lives is that western markets are, with the exception of some fabrication and industrial demand, almost 90% paper based. The huge COMEX futures market almost never sees an ounce of real silver or gold ever change hands. It is all paper, shuffled back and forth. These paper markets are being flooded with paper based "claims" to alleged gold and silver, supposedly being held in big bank vaults in London and New York City. The market is overwhelmed with paper claims, and the big bullion banks (maybe, with the Federal Reserve providing the money?) are paying big bucks to secondary derivatives dealers to get them to lease this artificially created “gold and silver.” In a normal market, one who leases a thing of value must pay for it.
But, now, derivatives dealers are being paid to lease both gold and silver. Then again, it may not be a thing of value, if it is fake…
That being said, the paper claims may have a lot of value, whether or not they are fake. Derivatives dealers can write futures contracts, options, etc., according to CFTC rules, because paper "claims" to vault-stored silver and gold can be used as the legally mandated "cover" for futures contracts. To understand the nature of paper claims, we must travel back in time, for a moment, to a class action against Morgan Stanley (MS (http://seekingalpha.com/symbol/ms)). According to the complaint, Morgan Stanley claimed that it bought physical silver, on behalf of various clients, and was storing it, in safe-keeping, in its vault in New York. Allegedly, Morgan Stanley defrauded its clients from Feb. 19, 1986, and Jan. 10, 2007. According to the complaint, it never bought any silver, but, all the while, continued to charge clients big fees for storing the imaginary metal. Morgan Stanley is one of the biggest investment banks in the world. It is one of the major players in precious metals.
Yet, according to the lawsuit, the paper claims to vaulted silver it issued to clients was nothing more than a lie. One of Morgan Stanley’s defenses, interestingly enough, was that everything it did simply followed “standard industry practices.” For more information, see here (http://www.reuters.com/article/fundsFundsNews/idUSN1228014520070612). Apparently, it is standard Wall Street industry practice to send people monthly statements promising that the firm is storing physical precious metals in a vault, charge for the storage, but really never buy or store any real metal. Morgan Stanley eventually settled the case for many millions of dollars in damages, rather than going to trial. That tends to indicate that they were guilty, as charged. I believe, with good reason, as you shall soon see, that most of the paper claims to silver and gold, now floating about, and collapsing prices, are cousins to the Morgan Stanley silver claims. Logic tells us that the so-called metal must be imaginary, and I will soon tell you why. Yet, for some reason, in spite of class actions like the one described above, no one demands to see it. The majority assumes that banks, like Morgan Stanley, are honest, and would not issue fake paper claims. But, if they did it before, they are probably doing it again. That could be the key to precious metal market manipulation.
If you are a huge bank, with hundreds of billions of dollars worth of short positions, and you know the price is going to explode, you can do one of two things. You can be honest, like most individual and institutional short sellers must be, and cover your short position by buying back at market prices even though you may take losses to do so. Or, you can be dishonest. The majority of banks and hedge funds don’t have the option of being dishonest, even if they want to be. However, what if you happen to be a primary dealer of the Federal Reserve, or the ECB, or the Bank of England, or all three? If you are, then you happen to have overwhelming knowledge and control of the marketplace, because your divisions are deeply enmeshed in the global financial trading system, and your powerful computers allow you to analyze all markets in a matter of minutes or even seconds. You have an ownership stake in all the big markets like the New York Stock Exchange, Nasdaq, COMEX, NYMEX, and the London Metals Exchange. Unlike a small or medium sized institutional investor, you are in a position to be dishonest, if you choose to be, and in a position to profit from your dishonesty. Because all orders flow, at one point or another, through your firm or one of a handful of other big wire houses, you will know where the stop-loss triggers of non-affiliated long and short sellers are. With this in hand, you are ready to manipulate any market, especially small commodity markets like gold and silver.
The first thing you need to do is issue large numbers of false paper claims to allegedly stored gold and silver in your vault. This gold and silver really doesn’t exist, but it doesn’t matter because you are a big prestigious bank, and no one questions you when you say it is in your vault. You offer these claims for “lease” to any secondary dealer willing to take you up on it. You don’t want to sell them outright, because then you might eventually be faced with a demand for the real metal, as Morgan Stanley was. You don’t actually have enough real metal to cover these claims, so, you want to make sure that the operation takes place in a limited time frame. That’s why you “lease” the claims for a term of months. If you find that small dealers are afraid to lease such claims, you encourage them by subsidizing the leases with a negative interest rate. In other words, you pay them to accept your alleged gold and silver.
This is exactly what is happening in the precious metals market, right now. Gold and, especially, silver leases are being subsidized. As of a week ago, if you are a dealer, and you lease gold or silver, from the bullion banks, incredibly enough, THEY WILL PAY YOU! At the end of this article, I have attached a chart, showing the current negative lease rates for the various metals. Dealers who lease claims to fake metal, are able to issue futures contracts and other derivatives. The fact that they hold contractual claims to metal means they will have fulfilled the “cover” requirement imposed by their federal regulator, CFTC. The CFTC has never bothered to audit a vault to see if the gold or silver is really there, so you’ve got nothing to worry about. You’re a big bank! You say it is there. Everyone believes you, just like Morgan Stanley’s customers believed them. You might even be Morgan Stanley.
At any rate, you initially issue a lot of claims to fake metal, and so many futures contracts are written, in a very short time period, that they flood the market on exchanges like COMEX and the London Metals Exchange, where almost all the transactions are on paper, and real metal rarely changes hands. Meanwhile, if you are the big bullion bank, you know what you are doing. You issue just enough subsidized precious metal paper to automatically trigger stop-loss orders. The price starts going down as the sell orders are filled. That triggers yet more stop-loss orders, and the process becomes one of dominos, falling one after another, until the price collapses. If the operation is successful, and the collapse is big enough, market confidence is destroyed, on a wide scale.
The destruction of market sentiment won’t last forever. You can’t fool all the people all of the time. But, temporarily, having been burned badly, investors refuse to buy. Buying may still be happening on the real market, as it is, in both America and India, in gold shops. True physical metal will still be in severe shortage, so the metal will disappear quickly, as the price goes down below where true market forces should be bringing it to reach equilibrium between supply and demand. But, real market buyers look to the COMEX and the London Metals Exchange, because they think they are honest exchanges, even though they may not be.
Prices on those exchanges will determine prices charged in shops, and when the price goes down deeply, there isn’t enough product to go around, because everyone buys it. In other words, supply and demand go into disequilibrium, there isn’t enough supply to meet the demand at such low price points, so delays in delivery, as well as outright shortages result. That is what is happening, right now, in the physical gold and silver market. Not only to retail investors, but, also, even to the U.S. Mint, which has suspended production of gold coins, and is rationing silver coins.
At any rate, when market confidence is damaged sufficiently, we can move in. We unwind our new short positions in the futures market, by buying back huge number of long positions at very low prices on the COMEX. We also unwind an exponentially larger number of positions inside the shadow world of "dark pools", which are little known secretive private exchanges, controlled by the big banks. It ended up costing us some money, but not a lot compared to the money we’ve avoided losing. We’ve paid subsidies on the leases, but we’ve never actually had to buy the gold or silver, because there isn’t any available, and none in our vault. This is the way that a group of big bullion banks could induce a price collapse to unwind hundreds of billions of dollars worth of potential losses, or position themselves to go long on hundreds of billions of dollars worth of potential profits.
Contrary to the pundits at CNBC, Bloomberg, etc., the price of gold really has nothing to do with the value of the dollar or the value of oil. It doesn’t matter what the dollar is worth, in relation to euros, pounds sterling or Zimbabwee money. It only matters what supply and demand factors exist for gold. Yes, the demand will fall a bit if the price goes up, for example, in euros, because the euro has depreciated. But, what really counts is not what the euro, yen or dollar price is, but, rather, whether or not there is enough demand to soak up the available supply.
Gold is priced in dollars, but, so long as people holding either dollars, euros, yen, yuan or Zimbabwean money, are willing to pay whatever price gold is selling for, in an honest market, the price should rise. Obviously, enough people are willing to pay for gold and silver, at the previous $978 and $19.50 per troy ounce price, because the U.S. Mint could not source enough metal at those price, and had to suspend coin production. This proves that people are more than willing to fork over, in whatever currency they are using, the previous prices for gold and silver, in such quantities, that a shortage was already existing, before the price collapse, especially in the silver market. It is true that people in poorer countries like India, might have back on their consumption.
But, while they were cutting back, demand and consumption of gold in North America, including Canada and the USA, was soaring. For example, before it suspended production of bullion coins, due to shortages, the U.S. Mint’s statistics show that it was printing 2.5 times as many gold coins, and almost 4 times as many silver bullion coins, this year, compared to last year. Gold and silver bullion, in bar form, was also flying off North American retail shelves.
Bottom line: Enough people were buying, when the price was high, to exhaust the supply. Basic economics says that, in a free market, this means the price must rise.
But we don’t live in a world of free markets. Instead, we are living in an Orwellian 1984 double-speak world. Welcome to the world of Fed/PPT, where 2+2=5, blue is yellow, and black is white. All things are as they say they are, rather than as they really must be. Welcome to the world of a controlled business media, where the pundits will do anything and say everything to convince you to forget your math, and your eyesight. No, they tell you. It really isn’t so. What you’re seeing isn’t the way it is. Believe, instead, what we tell you. We can do it! We have special skills. There is a new world order. We can make 2+2=5. Just give us your money, and we’ll show you how!
But, let’s return to reality. Right now, virtually no North American precious metals dealer can give you a firm delivery date on large quantities of silver. They have no stock to sell. This means demand is robust. On Friday, as the COMEX gold price was collapsing, the U.S. Mint suspended gold bullion coin production because it cannot source enough gold bullion! That could not happen if bullion banks were selling claims to real physical metal into the marketplace. Indeed, the Mint began rationing silver bullion coins two months ago, when it started having trouble sourcing silver bullion. Word from the Perth Mint in Australia is that it is taking weeks or months to take physical delivery of gold and silver, even though investors are already supposed to own that metal. Supposedly, it is simply being kept in the Mint's vault for safe storage. But, it is getting harder to take it out of “storage”. Meanwhile, as previously stated, Indian gold and silver dealers, wholesalers and banks all have empty vaults. None of this can happen if demand is down, and supply is abundant.
We have a disconnect between reality markets and fantasy markets. The COMEX and London Metals Exchange are fantasy markets controlled by the big bullion banks. They must be engaged in market manipulation, because nothing can explain a big price collapse, in the midst of widespread shortages and robust demand. A group of big financial institutions, deeply enmeshed in the global trading system, and heavily involved in the gold and silver market, must be deliberately inducing temporary panic, for their own purposes. These malevolent characters will eventually be able to buy back their short positions at low prices, and, possibly, also, even collect a significant long position. The process is a continuing one, and hasn’t stopped yet. On Friday, for example, the subsidy for leasing gold and silver was raised to very high levels.
It is obvious what they are doing. More important, however, is why? What does it mean?
Well, the PPT bank executives are generally “people in the know” about financial events, before they actually happen, sue to close relations with regulators like the Federal Reserve, and FDIC. They folks are so desperate to cover short positions, that they are willing to spend a billion or so dollars, subsidize precious metal leases, to collapse the market, and destroy investor confidence. But, why? We know that the Federal Reserve, like other central banks, sees gold as a rival to the dollar. But, that’s not enough, because they’ve never attacked precious metals with such ferocity as now, and, if the Fed were directly involved, they could probably supply real metal. If something terrible is about to happen in the financial world, the losses that big banks would take on their precious metal short positions would put most of them into bankruptcy. Remember the words of Warren Buffett. Derivatives are the financial world’s weapons of mass destruction. Precious metals futures short positions are highly leveraged transactions that could cost hundreds of billions if the price of gold were to suddenly explode.
We can guess that the main players here are big powerful Wall Street and/or High Street investment banks who work closely with the Federal Reserve, the ECB, and the Bank of England. These people are privy to the information needed to carry out a massive manipulation as described above. No one else is. Since most of the collapse happens on the COMEX, we can assume that most of the manipulation is being done by New York based investment banks. Wall Street’s investment banks control most of the world's gold and silver markets. They are also entrenched in the overall mesh of all financial markets. Making matters worse, because of the 1987 President’s Executive Order on Working Markets, they are authorized to work together, and in conjunction with the U.S. Treasury and the Federal Reserve, to manipulate markets without fear of criminal prosecution. They know exactly where the stop-loss orders are, and how much flooding of paper claims for gold and silver would be needed to trigger them. They are, therefore, perfectly positioned to carry out the nefarious scheme I have outlines. The ultimate aim, of course, would be to destroy investor confidence, by collapsing the price for a few weeks. This would allow them to unload their own exposure at a very low cost, while the majority of market participants are temporarily shell-shocked, and in retreat.
As noted above, they are not using real gold or silver to do this. That implies that this particular attack on gold was not authorized by the Federal Reserve. They’ve never had any real silver and have used paper claims for years to manipulate that market. But, gold has often been supplied out of the U.S. hoards at Fort Knox, West Point, or the NY Fed. I suspect all three have had their gold hoard so heavily loaned and swapped out, that there is little or no physical gold left to play with. That’s why the Federal Reserve has been pushing for the IMF gold sales. The vaults are probably already filled with IOUs from the likes of Goldman Sachs, JP Morgan, etc. Perhaps, that is why the Treasury Department lists total U.S. gold holdings as "gold and gold swaps", and refuses to disclose details how much consists of real gold and how much consists of swap IOUs (loaned out gold). But, anyway, the lack of physical gold probably implies that the Federal Reserve is not involved directly, because they probably still have enough to flood the market for a week or two.
But, it’s not cheap to manipulate markets. It will probably cost over a billion dollars to subsidize the negative lease rates. The only logical reason to spend such a huge amount of money, is if you are going to get an even bigger benefit from doing so. They must be very worried about losing far more. Once again, that implies that some VERY bad economic news is about to be released. Skeptical? How much worse can the economy get? It can get much worse! So, what’s in store? A series of huge bank failures, maybe? IndyMac collapsed two weeks ago. Are we going to see the collapse of Washington Mutual (WM (http://seekingalpha.com/symbol/wm))? National City Bank (NCC (http://seekingalpha.com/symbol/ncc))? Someone else? I don’t know. But, I do know this. The FDIC will not have enough cash to make good on its insurance pledges, if they fail. The FDIC only has $37 billion left in its trust fund, after paying off IndyMac depositors. Between its two major divisions, WaMu has total deposits of about $204 billion. National City has about $101 billion. Could FDIC turn to the Federal Reserve for a quick loan? Not a chance! The Fed has its own problems. It has already polluted its balance sheet with some $450 billion in low value and absolutely worthless mortgage paper that its client banks wanted to get rid of.
Depositors might wait months for their money, while Congress is petitioned to approve the sale of more Treasury bills. This delay would be likely to cause other depositors to make a run on other banks, creating a domino effect. Then, more banks might fail. More bank failures will require yet more dollars, and cause more delays in making depositors whole. At the very least, the sudden issuance of $300 billion new dollars would stimulate massive inflation. Under such circumstances, gold could be expected to explode to the $2 - $3,000 per troy ounce range, within a matter of a few weeks or months.
click to enlarge
http://static.seekingalpha.com/uploads/2008/8/18/saupload_jc_thumb1.jpg (http://static.seekingalpha.com/uploads/2008/8/18/saupload_jc.jpg)
Source: Kitco
Update: I just found out that Kitco, one of the biggest precious metals dealers in North America, just posted the following notice:
IMPORTANT NEW NOTICE: Due to market volatility and higher demand in the entire industry, we are anticipating delays in supply of all bullion products. Please note that you can continue to place orders and prices will be guaranteed; however, cancellation fees will still be applicable regardless of the length of the delay. Consequently once inventory is received there may also be delays in processing and shipping by our vaults. (italicized emphasis added)
Sounds like a severe shortage to me, when someone will take your money, and then, even if it takes two years to deliver, and you cancel, they force you to pay a penalty!
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