The Gold Manipulation Is Playing In The Hands Of The Chinese With Far Reaching Consequences For The Reserve Currency Status (Part II)

The physical buying has been overwhelming all over the world

Under normal sell-offs investors are not in such a rush to acquire the physical (except in India perhaps), in fact people are more likely to sell off the physical because their confidence gets affected. But not this time, this time it is different and clearly proves that the manipulation was orchestrated and that many investors don’t believe the bull market is over! Even if Warren Buffett, the greatest investor of  all times, states that he even wouldn’t buy gold at $800/oz because it isn’t a productive asset. Buffett understands cash flow but he doesn’t understand tech/internet and gold in my point of view. Gold is not a productive asset, gold is a currency it is the ultimate currency, it is a currency that can’t be manipulated unlike paper money that can be printed ad infinitum. Next to that articles in the WSJ of May 17 with headings like “Gold’s allure is starting to fade” tell me that we are at the bottom as illustrated by the price movement of gold on May 20, putting in a double bottom (see Marketwatch gold chart) with gold rising $57 from $1,336 to $1,393 for the day.

All the mints around the world have been selling out of their precious metal coins and delivery times increased to 6 weeks and longer and mints are no longer accepting orders because they don’t know what the future prices will be. And this buying trend isn’t only occurring in the U.S. In Bangkok, Thailand crowds of buyers were eagerly waiting in multiple lines to purchase gold jewelry and coins. Gold and silver imports into India totaled $7.5 billion in April, more than double the $3.1 billion in imports a year earlier. According to The Wall Street Journal, “Gold shops from Tokyo to Dubai have witnessed frantic buying of the coins, alongside other items such as gold wedding bracelets. The surge has been triggered by cheaper prices.” We saw a similar situation in China were the China Daily reported a similar buying enthusiasm occurring in jewelry stores in Beijing, Shanghai and Guangzhou. Shanghai’s newspaper reported that “while gold markets in the United States and Europe saw panic selling, sales of gold bars and jewelry jumped in China as buyers viewed the lower prices as an opportune moment to invest.”

Huge premiums are paid for the physical

Instead of capitulating to fear of greater losses, the demand for physical gold has hit new records, the price elasticity has increased dramatically. The US Mint sold a record 63,500 ounces – a whopping 2 tons – of gold on April 17 alone, bringing the total sales for the month to 147,000 ounces; that's more than the previous two months combined. Indian markets, which are more oriented to physical metal, saw a premium for gold of US$150 over the futures price in Chicago. Demand at coin dealers increased as the price has dropped. And premiums are much bigger than they were before the sell-off. Why would there be such an overall consensus to massively buy physical gold and silver! BECAUSE IT IS DIRT CHEAP! Or are so many people all over the world wrong?! “It is Soros against the Chinese housewives”! Though it should be mentioned that Soros still has a large position in mining companies. In my point of view the very cheap gold or silver mining shares represent an one in a lifetime option on future gold and silver production. See below the chart of gold vis a vis the HUI index which shows the much higher beta of the shares versus the bullion on the way up as well as on the way down.

CEO of the CME: “They don’t want the certificates, they want the real product!”

The conclusion I have is that the paper gold/silver Ponzi scheme, whereby only a fraction of the gold is available, is being tested by the worldwide demand of the physical. Precious metals investors all over the world are beginning to ask for, real evidence of, ownership, not just to hold paper certificate promises. If you don’t hold it physically you don’t really “own” it. I can’t emphasize this enough.

Terrence Duffy, executive chairman of CME Group Inc on gold on Bloomberg TV, April 29, 2013 said the following: “They Don’t Want Certificates, They Want the Real Product.” Being interviewed at the Milkin Conference he answered as follows: “What’s interesting about gold, when we had that big break two weeks ago we saw all the gold stocks trade down significantly, we saw all the gold products trade down significantly, but one thing that did not trade down, was gold coins, tangible real gold.  That’s going to show you, people don’t want certificates, they don’t want anything else.  They want the real product.” Well do we need any more proof from the horse’s mouth that the manipulators completely misjudged the situation and got the opposite of what they wished for?

The paper price is a bogus price

The paper price is no longer the benchmark of valuation, the paper price is a bogus price, when an increasing number of investors prefer the physical above the paper gold being afraid that they won’t be able to secure the physical in the future using futures. It is all about taking and having possession of the real thing and not about a promise that is not backed up by the physical. The paper market is clearly losing integrity.

Backwardation confirms the weak future (paper) price and the strong spot (physical) price

As described in an earlier blog article, we are clearly witnessing backwardation in the gold and silver prices which is unusual because normally the market is in contango whereby the future price is higher than the spot price because of the extra cost of interest (very low now), insurance and storage. Backwardation is when your spot price is higher than the future price which is the situation for gold and silver at present because of the strong physical demand in relation to the artificially low paper gold and silver prices following the manipulation of the bullion banks.

Naked short selling is in the process of losing its price depressing effect

Immediate shortages or other factors drive up prices of near deliveries such as scare buying, hoarding and the like, whilst normally producing weak prices in the future. Well that could be different this time because of the continued strong worldwide demand for the physical because of the attractive prices and the loss in faith of future deliveries of the physical through futures. The selling of futures might not work anymore in the future especially when it has the opposite effect and people don’t want cash settlement but physical settlement. The ammunition is losing its price depressing power. The manipulators tried again to depress the gold price from $1,475 to $1,335 in the week of the 12^th to 18^th of May though we again witness a strong rebound on May 20^th to $1,393 probably putting in a double bottom as mentioned before.

In any case all the pieces of the puzzle are fitting and the conclusion is becoming more and more obvious. 

Why is there no arbitration between the paper and physical price for gold and silver? And in other words why doesn’t the paper price moves up to the physical price. Where is the (dis)connect?

This is something that has been puzzling me. Why is there no arbitration between the paper and physical gold and silver? The only answers I can come up with are that the paper is traded as a standardized contract at exchanges, amongst them the Comex, whilst the physical is  “traded” by local mints by means of bi-lateral contracts all over the world. Next to that the paper or futures market is not really backed by the physical as we know. And thus in case one would buy a future contract and would try to sell the physical at the higher price, “there is no physical to back up the delivery”. A lot of people that have tried to get the physical from the Comex (CME group) through exercising their futures have often run into long delays or has to suffice with cash settlement. The amount of physical that backs up the futures is a fraction (10% or less) of the underlying contracts and thus it is virtually impossible to sell the paper contract to a physical buyer. This disparity is used by the manipulators to influence the markets and the reason we have the disconnect in pricing.

Inventories have been falling steeply

Next to that as we can see on the following charts the Comex warehouse gold inventories have been falling steeply since the beginning of the year in tandem with the falling gold prices. So does that mean that there is less gold available or is it that investors have taken physical possession because they don’t trust the ability of the Comex to honor the future physical delivery obligations of gold and silver moving it to a safer place.

COMEX

In light of the aforementioned I believe it is important to explain in more detail about the workings of the Comex. The Comex, commodity exchange, owned by the CME group, is an exchange that also offers metal warehousing and storage options for its clients. The Comex is a private exchange, which is strategically important to the Government not the least because it is in the Government’s interest to defend the US dollar and depress gold. The list of their gold and silver warehouses where the gold and silver can be stored can be found on the CME website and two names jump to the fore: JP Morgan and HSBC! Next to the fact that they are market makers in gold and silver they thus also store the gold and silver for the Comex inventories and are custodians for the gold and silver ETFs. What a cozy relationship! The silver and gold is stored at these official warehouses on behalf of banks and their clients and “can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.”

Registered and eligible metal inventories

There are two categories of gold and silver inventories at the Comex: eligible and registered stocks (1000 ounce bars for silver and 100 ounce bars for gold with specific purity and refining requirements). The first category, eligible metals (6.3m ozs, May 17), are stored at COMEX warehouses on behalf of banks or private parties but are not available for delivery for futures contracts. Registered metals are similar to eligible metals except that these metals are available for delivery to settle futures contracts. Only 1.6m ounces were available for delivery of these futures contracts on May 17 whilst the number of daily futures contracts traded on the Comex are around 200,000 to 250,000 contracts which equates to approximately 20-25 million ounces changing hands on a daily basis. The COMEX issues a daily report how much eligible and registered metal is present. This can give some insight how many clients are requesting delivery of their metals or what the developing trend is. On the basis of the declining inventories it is clear that either some large clients want to have the physical possession of the gold or that bullion banks were forced to deliver the gold.

Force Majeure clause: “a determination is made by the CEO!”

Anyway discussing the workings of the Comex we should also emphasize that the Comex can always, when there is a shortage of the physical for delivery, call upon. Rule 7B01 (“Declarations of Force Majeure”), thereby declaring a condition of force majeure. A force majeure is described as a contract clause that frees parties from liability due to an event outside of their control. Under rule 7B01 if “a determination” is made by the Chief Executive Officer, President or Chief Operating Officer, or their delegate, that delivery or final settlement of any contract cannot be completed as a result of Force Majeure, he shall take such action as he “deems necessary under the circumstances”, and his decision shall be binding upon all parties to the contract. The Exchange shall notify the CFTC of the implementation, modification or termination of any action taken pursuant to this Rule as soon as possible after taking the action. It shall be the duty of members, clearing members and Service Providers as defined in Rule 7A01. to notify the Exchange of “any circumstances” that may give rise to a declaration of Force Majeure. Besides this bazooka the Comex can of course its tool of increasing the margin requirements which will trigger sales and often free up the physical.

If you don’t have physical possession you don’t have anything!

And thus you can enter into a contract and buy some “paper” gold via the CME and then a “determination” can be made by the CME calling “certain (discretionary) circumstances” a “Force Majeure”. The CME can then take whatever action they “deem necessary”, and their decision is binding and final. So they could quite easily turn around and say that you’re not getting your gold at all but fiat paper, cash settlement, instead defying the point of getting physical delivery Again as mentioned before, I can’t emphasize it enough, unless you hold the physical in your possession you don’t have anything because you really own is a claim on the gold and not hold the gold itself. Two completely different things. The only exception is when you have shares in gold or silver mining companies because then you own basically an option on future gold and silver production. And of course that is on the condition that the gold and silver mines are not nationalized. That is why a good geographical spread of mining operations is crucial. You have to ask your self the question what options Governments have when their coffers are empty.

The three categories that determine the Commitment Of Traders (COT) report

Commercials - Miners

Last but not least one of the most important price determining factors is the Commitment of Traders (COT) report, which is issued every Friday and gives an indication how the market is positioned. It details the long and the short positions of three categories of traders. The first category is called "commercials." They are dealers in the physical precious metals – for example, gold miners, the ones that need to hedge the production they are physically going to deliver at a future date.

Non-Commercials – Bullion banks and hedge funds

The second category is called "non-commercials." They include hedge funds and bullion banks. According to the World Gold Council, bullion banks are investment banks that function as wholesale suppliers dealing in large quantities of gold. All bullion banks are members of the London Bullion Market Association (LBMA). The London market if often referred to as a "physical" market although it is largely a paper market where the bullion banks sell 100 times more bullion than they actually have. The market makers of the LBMA are Barclays Bank, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan Chase, Merrill Lynch International Bank, Mitsui, Societe Generale, Bank of Nova Scotia, ScotiaMocatta, UBS. Any familiar names? Societe Generale writing that the bull market in precious markets is over and Goldman not recommending a sell but a short!? See the following quote of Société Générale: “Our expectations for rising interest rates, driven in part by a positive view of the US economy with an associated improvement in the dollar, could
be the perfect storm to start a longer-term bear market. Professional sentiment, as evidenced by heavy redemptions in ETFs and the increasing willingness of managed money investors to trade from the short side, confirms our view that gold may have had its “last hurrah”.

“Positive view of the US economy”! The beauty is in the eye of the beholder. We all know how not sustainable the economic figures are. The US dollar is not improving on the basis of its fundamentals in my point of view but on the strong weakening of the Yen (perhaps even instigated by the Fed to boost the US dollar). Big difference! So as a result of the perceived strength of the US dollar the gold price is weakening. Next to that gold has seen corrections (and even more severe ones) before and if you look at the following chart you can see how nicely gold bounced back from the support line.

© 2013 by King World News

Think again! Non-commercials are also called "large speculators."  Large manipulators would be a much better description.

Non-Reporting – Small traders

The remaining third category are the small traders, called the "non-reporting" category since they are not required to identify themselves.

The ones to watch are the large speculators better called the large manipulators

The ones to watch are the large speculators (non-commercials), as mentioned here above better called the large manipulators! They tend to move the direction of the markets. The bullion banks follow the unscrupulous practice of making paper bullion out of thin air with the only purpose, next to their own gewin, to suppress the value of any investment in real metal. Nobody has ever been able to accuse them of pushing prices higher! These players have so much financial power and control and insight in the workings of the market that they can easily set or influence the pricing of the market. Next to that they are sanctioned and backed by the US monetary authorities because they help defend the US dollar, the reserve currency. They know where most of the stop losses are positioned and can easily trigger those stop losses with maximum effect especially just before or after the weekend when trading is thin. In other words “which free markets”? I think it is clear, in terms of size and vested interests, who are behind the manipulated price movements.

The US authorities need to defend the US dollar against gold!

The fact that the US authorities don’t have any choice but to defend the US dollar, the reserve currency, and thus needs to push down the gold and silver prices (the US dollar and gold and silver prices are inversely correlated), plays exactly in the hands of China (official gold reserves 1,054 tons) and Russia (official gold reserves 958 tons). China and Russia are strong buyers of gold diversifying their US dollar receipts from exports and oil (by the way silver was the currency in China till 1933). Of China’s $3.4trn in forex reserves some 36% consist of US Government debt whilst an additional 30-34% is in other US dollar denominated debt. The exposure to the US dollar is the result of their strong exports to the US and Europe and because the US dollar is the reserve currency. Because of its huge exposure to US denominated assets and the constant debasement of the US dollar China needs to hedge these assets and what could be better than buying the opposite of the US dollar: gold. Next to that I believe it is highly likely that the next reserve currency will have to be backed by gold considering the unlimited printing that is going on. The world will need a “disciplined” currency to restore credibility.

Especially under weak economic circumstances and massive QE it is difficult to defend a strong dollar hence Fed’s buying of more than 70% of all treasury issues

The US is between a rock and a hard place. In this low interest rate environment the Fed has to print without devaluating the dollar (in other words preventing gold from going up, if gold would rise strongly it would frustrate the confidence building efforts in the bond and stock markets which in turn would frustrate growth). The Fed is buying more than 70% of all bond issues! The Fed is now at the point that conventional monetary expansion, printing to buy debt, is unproductive or already counter productive (deflation, which equals no economic growth!), it is even willing to increase its QE!? And nobody is asking questions! THINK! THE FED IS BUYING MORE THAN 70% OF ALL BOND ISSUES. THINK AGAIN! JUNK YIELDS ARE AT 5%! WHERE DO YOU THINK NORMALISED INTEREST RATES WOULD BE AND WHERE THE STOCKMARKET WOULD BE! We are setting ourselves up for one of the steepest and longest falls in history. Ultimately everything goes back to the median.

Risk/Award analysis doesn’t favor treasuries any longer

There hasn’t been a lower yield ever. According to Timely Portfolios if the 10-year treasury would go to zero the upside would be only 17%. But more importantly any increase in yields would show up as large losses because of the very low nominal level of the current rates, 1.96% for the 10-year treasury yield. And therefore only a small nominal increase would translate in a big percentage increase. For example, an increase of only 1% would cause the price to decline by about 20% or put another way, 7 years of income is required just to get back to even. In other words the risk/reward analysis clearly illustrates that the current state of bonds is not worth investing in. And when the market turns it will likely be very ugly because some people are owning these bonds and not the least the Fed who will incur huge losses. I am therefore very curious what kind of “painless” exit route the Fed has in mind.

The last two quarters the top line figures of the Dow Jones constituents were negative whilst share-purchase programs “rescued” EPS

Contrary to what many people want to believe the economy is not really improving, “there is no sustainability”, as is demonstrated by the conflicting economic figures. In the fourth quarter of 2012, the Dow Jones Industrial Average had negative earnings-per-share (EPS) growth and revenue growth of less than 1%. The first quarter of 2013 Dow Jones Industrial average EPS growth was about 1% whilst revenue declined by 2.65%. In other words negative top line growth and without the aggressive share-repurchase programs, the EPS results would have been far worse. Concluding, the results of the Dow companies have actually been contracting in 4Q12 and in 1Q13 whilst the index has been breaking record after record. What else can I say then “Houston we have a problem!”

Unemployment figures propelled the S&P 500 above the 1600 level!?

This brings me to the April unemployment figures which definitely are not as strong as investors would like to believe despite the very positive reception. The number of part-time employees who are seeking full-time work continued to grow, the average number of weekly hours worked continued to shrink -0.2 hour or 12 minutes per workweek (ceteris paribus one could also translate that situation in a loss of jobs, see below), average weekly earnings fell by 0.4% and large numbers of discouraged workers continue to exit the workforce (we have the lowest participation rate since 1963!) with 306,000 people joining the ranks of the self-employed because most of them have no option but to start for themselves.  Involuntary part-timers and those who have given up looking are not counted among the unemployed, the U-6 underemployed percentage went up from 13.8% to 13.9%. "Underemployed" respondents are employed part time, but want to work full time, or they are unemployed. "Unemployed" respondents are those within the underemployed group who are not employed, even for one hour a week, but are available and looking for work. So how come the underemployed rose and the average workweek declined by 0.2 hours whilst the employment picture is so-called improving? Normally when the economy improves the number of part time workers decline because employers will offer part timers full time employment because they are getting more confident.

April unemployment figures a clear example of CREATIVE or FALSE ACCOUNTING!

Digging deeper there is an answer. Coming back to the to the shortening of hours worked per week by 0.2 hours or 12 minutes equals, taking into account 135m people working, to firing 784,000 people (taking into account an average workweek of 34.4 hours) whilst keeping the hours working stable. CREATIVE ACCOUNTING? Anyway the employment figures are much less pretty than people are made to believe. Instead of 165,000 jobs created in April according to the Government the real result is that 619,000 jobs were lost in April! You have to compare apples with apples. Again everything seems to be rigged and hardly anybody seems to pick up on it. The May unemployment figures published on June 7 should give us some more clarity about the real employment situation.

Because of the strong correlation between the Yen and gold the American authorities “asked” the Japanese to push down the Yen using QE

In any case, as stated, despite the deteriorating financial and economic circumstances, the Fed has to defend the US dollar as the reserve currency (with the help of the Japanese) and therefore keeps on depressing the gold price and thus subsidizing it for the Chinese and Russians and other countries! And I believe that under the increasingly challenging circumstances the manipulation of the gold price will become  progressively more difficult. If the manipulators try again to push down gold and silver (as witnessed last week) physical demand will again show what the real situation is. In my point of view we are getting to the point that all the tools in the toolbox are getting exhausted. See below the charts of the inverse correlation between the gold price and the US dollar index and the very strong correlation between the gold price and the strength of the Yen. In other words what could be more helpful than ask the Japanese to weaken their currency in order to bring down the gold price!!! Hence why they haven’t been really condemned by the G7 and G20.

Nevertheless I believe strongly who has the gold has the power. In this context it is even more interesting that there is a story going around that the Chinese so far have increased their gold reserves to some 4,000 tons, half the amount the US allegedly has!

China is not disclosing its official gold holdings, they “have been static” since 2009 at 1,054 tons, for obvious reasons

China is the world’s #1 producer. China's gold production in 2012 rose for a sixth consecutive year and increased by 11.7% to 403 tons. China has seen its gold demand jump in recent years as an increasing affluent population turns to gold as a hedge against inflation and corruption in China. In 2007 the country overtook South Africa as the world's top bullion producer and its gold output has doubled since 2003 from 200 tons to 403 tons showing a compound annual growth rate of 8%. Over that period China produced some 3,000+ tons of gold. China has said that it aims to produce between 420 and 450 tons of the precious metal in 2015. See the hereafter an overview of world’s top 20 official gold holdings as per January 2010. A much better overview would of course be a summary of the real, present, physical unencumbered gold reserves! Several central banks have reserves with the NY fed and thus don’t have that gold they allegedly own in their physical possession. And as said before in my point of view you don’t really own your gold till you have it in your possession.

Source: IMF (World official gold holdings as at the end of January 2010, March 2010 Report), WGC estimates

China’s gold reserves likely to be much higher

In April 2009 China increased its gold reserves to 1,054 metric tons, according to a report by Xinhua News Agency, which cited Hu Xiaolian, head of the State Administration of Foreign Exchange. Hu said that China's gold reserves had risen by 454 metric tons since 2003 to 1,054 tons in 2009 and that the total was being reported to the IMF per the organization's rules. And at present China is still reporting “official” gold reserves of 1,054 tons (World Gold Council April, 2013) whilst it has produced approximately 3,000+ metric tons of gold since 2003. Next to that in 2011 alone, mainland China’s gold imports had soared to 834 tons. China’s imports through Hong Kong – believed to be the principal route by which gold bullion reaches the Middle Kingdom – have already been increasing dramatically in the first three months of 2013, culminating in imports of 223.5 tons in March alone (2012 world gold production 2,700 tons).

China is probably not disclosing its real holdings because it doesn’t want up the gold price as long as possible because the moment the public becomes aware that China is amassing gold the sky is the limit. Still, considering its considerable purchases, people wonder how long the Chinese can keep on accumulating gold without triggering a strong gold price?

With China presumed to accumulate gold what are the ramifications for the US

As mentioned before there are serious doubts going around if the US has the gold that is attributed to the US in its vaults of Fort Knox and the NY Fed (think of the 7 year delay in returning “only” 300 tons of the Bundesbank gold!?).  If the gold, 8,133 tons, is not present because the US has leased out most of the gold over the years (to demonetize gold) it could pose a very strong threat for the US dollar as the reserve currency, especially vis a vis the Chinese Renminbi which is increasingly backed by physical gold in my point of view. It could very well be that the emperor doesn’t have any clothes.

The US can’t buy any gold whilst China can!

As mentioned in previous blogs the US government “can’t” buy gold because, being the “printer” of the reserve currency, it would undermine the credibility in the US dollar, a medium of exchange, instantly. As a result people wouldn’t accept the US dollar anymore as currency, a medium of exchange, for gold, especially when you can print the paper ad infinitum, as we are currently witnessing.  The US can’t buy gold and has to suppress it to defend the US dollar, the mirror image of gold, whilst China the new kid on the block is amassing gold on the cheap, at depressed prices. What is almost comical is that China, contrary to the US, can swap it’s soon to be worthless US dollars for real money: gold!

Do you see the irony and danger? Next to that one has to ask themselves when the US dollar would lose its reserve currency status what will happen to the military power of the US? The reserve currency and military power are interlinked so imagine how important it will be for China to have the Renminbi gain reserve currency status with the help of gold! I think the cartoon very well illustrates what the real situation is between the US and China in terms who can justifiably say “Show me the gold”.

The US clearly is in a difficult position and its starts to come to the surface. Wonder why U.S. Federal Reserve Chairman Ben Bernanke will miss the annual Jackson Hole monetary policy symposium this year, due to a scheduling conflict! Bernanke's absence would mark the first time in 25 years that a Fed chairman has not attended. Well I could think of a couple of reasons why he wouldn’t attend! It is no longer sustainable and he might not want to answer the questions that are being asked! And you can fill in what it stands for.

How long can the paper gold price have credibility if it doesn’t match the real price of physical gold? In other words the manipulators are at their last legs.

Considering all discussed matters (backwardation, China’s gold accumulation to establish financial/economic and military hegemony, strong physical buying all over the world, deflation, the Fed buying 70% of all treasuries) the question begs how long can the paper market show a price that has credibility when it apparently doesn’t have any serious relation with the price of physical gold, the real gold, because it isn’t backed by the physical gold. It is the same as with paper money you constantly dilute the money in circulation have unmanageable debts and a weak and not improving economy. Even if the charts looked bad, as many people believed, I still think that the price of gold “had to go down” and expose the discrepancies in order to rise strongly. C’est reculer pour mieux sauter (step back in order to jump further) . Both sell-offs clearly had the opposite effect of what it was meant to do: depress the gold price.

The physical buyers that have come out of the woodwork worldwide very much proved how manipulated this sell-off was and that all these so-called gurus who state that the bull market in precious metals is over better seek another profession. I agree we could face deflation (means we don’t have economic growth and or that there is no full capacity utilization) with the QEs now being counterproductive and not delivering the desired growth. Initially this could depress gold and silver prices because of the “strengthening of the purchasing power” of the different currencies. Remember gold and the currencies are inversely correlated through the US dollar, for now still the anchor still the anchor of the financial system. Though as a result of deflation debts (which become worth more because everything else will become worth less, moreover nominal values stay the same whilst real values will go down) will bankrupt the economy and ultimately in my point of view gold and silver will be one of the few safe havens to preserve your capital. Gold in my point of view is the ultimate currency and all disbelievers better explain to me what, when this system fails, will replace the US dollar! The promises of the politicians? Think again, that is reason we are currently in the situation we are in. The manipulation (paper) needs to be urgently replaced by real discipline: gold or gold backing!

Could the Renminbi replace the dollar as the reserve currency? I don’t exclude it but then it will definitely have to be backed by gold (synonymous to discipline and no manipulation) hence the efforts of the Chinese to accumulate gold reserves. If the Chinese announce and prove the physical possession of their strongly increased gold reserves it could trigger the question if the US can account for the physical gold reserves, 8,133 tons, it allegedly has. The 7-year delivery time of Germany’s gold to the homeland is not exactly a motion of confidence regarding the trust in the NY Fed and US monetary authorities that the gold that has been stored by foreign governments is indeed accounted for in the US vaults. The ABN AMRO story and other stories with respect to Swiss banks that can’t deliver the physical gold also don’t bode well. Don’t be naïve, think of the money market fund in 2008 that broke the US dollar because its fund managers hadn’t invested the received funds in the money markets but in mortgage backed securities in order to gain a higher return! Anything is possible. It was recently emphasized again that this time the Treasury will not be able to come to the rescue in case a similar situation occurs. Just be aware people and institutions have their own alternative motives.

In all commodity markets, except gold and silver, you cannot get away with selling commodities that do not exist or will not be produced in the near future because all other commodities are produced for consumption, so bona-fide consumers must have them delivered at some point. By contrast, much of investment gold and silver is produced only to be stored in a vault. So unlike any other commodity, with gold and silver there is the potential for unscrupulous bullion banks not to have all the metal they sell actually residing in their vaults (think of the Goldsmiths in the 17^th century, the “frontrunners” of the fractional reserve banking system), provided they have enough to meet the delivery demands of the anticipated small number of investors who will ask for it.

Banks treat their precious metal deposits in much the same way as they do deposits denominated in money, as the reserve asset against which they lend additional money to borrowers. Today very little bullion is available to rescue the bullion banks when they would face a run on their “fractional” inventories. The cash settlement of gold deliveries in fact can be seen as a run on the banks for the gold. “Show me the gold!” I don’t think my conclusion would be far off that if and when the fractional banking system fails the same will happen to the bullion futures market and visa versa.

Contrary to gold in silver there are no large aboveground stocks. The central banks have sold all their silver inventories over the years. Only the central banks of Russia, China and India might still have some silver left in their inventories. The bullion banks are therefor even more exposed with respect to silver delivery obligations than they with respect to gold. Though don’t forget that the silver market is much less deep than the gold market and thus easier to manipulate.

Conclusion

On April 15 400 tons of gold was sold, 1 ton is the equivalent of 32,000 ounces, so 400 tons is approximately 12.8 million ounces. That's $19.8 billion worth of gold at $1,550 per ounce. The equivalent of 15% of total world annual gold production was put up for sale within a few short hours! Though you have to ask yourself only two questions! Why would a party sell this amount of gold, 15% of annual world production (by the way which party has so much gold???) at once and when trading is at its thinnest? And why is there no investigation in the highly “coincidental” sequence of events by the SEC or Comex with Goldmans trumpeting not a sell but a SHORT!!! And a few days later a buy!! If you answer these questions in a rational way you probably understand what is really going on.

To “ask” or “suggest” the Japanese to implement a strong QE of $75bn a month “in order to invoke inflation and get economic growth growing” is a smoke screen to say it at the least. Its main purpose in my point of view is to get the gold price down because the very strong correlation of the Japanese Yen and the gold price. Thus when the yen weakens the gold price weakens (see chart again here below), exactly what the US authorities want in order to defend the US dollar reserve status.

Though in my point of view the efforts of the parties involved to depress the gold and silver prices has turned out to be counterproductive with strong physical demand erupting worldwide. People clearly voted with their feet. A second attack started last week is also failing miserably.

The paper price evidently turns out to be a manipulated price whilst the physical isn’t. The main reason there is no arbitrage between the future and paper price is that there is hardly any physical backing for the futures on the Comex. And therefor the difference between the future and physical price is the price for the counter party risk, for when the Comex, the counter party, can’t deliver the physical.

The US can’t buy gold in order to replenish its reserves because it would discredit the US dollar. Though that problem doesn’t exists for the Chinese because they don’t have to defend the status of the reserve currency. In fact as a result of the gold depressing efforts of the US they play exactly in the hands of the Chinese enabling them to buy the physical gold on the cheap. This could ultimately challenge the reserve status of the US dollar and thus the military power of the United States.

It is clear in my point of view which interests are playing here though that doesn’t justify the manipulation and the incurring of huge losses on ordinary market participants not being part of the inner circle. The eroding rule of law seems to be a sign of the times we are living in and will ultimately result in an implosion of still remaining “values”. Ultimately substance will win over form. Enjoy the Tepper effect as long as it lasts but don’t forget who has the gold (physical) has the power.

© Gijsbert Groenewegen

g.groenewegen@goldarrowpartners

www.groenewegenreport.com