Reflections in a Golden Eye
by Michael J. Kosares, Gold Seek Reflection #1 Tightness in the gold and silver coin and bullion markets “My baseline is they [the Chinese] have been buying and the Indians have been buying in enormous quantities. It’s virtually impossible to get physical gold in London to ship to those countries. We get permanent requests from Russia, would we please sell our physical gold to India and China. Because there is no physical, only endless promises. And I really worry that the market, that paper market, could be stamped on and people will say ‘sorry we’ll have a financial close out,’ and it’s all over.” “The cost of borrowing physical gold in London has risen sharply in recent weeks. That has been driven by dealers needing gold to deliver to refineries in Switzerland before it is melted down and sent to places such as India, according to market participants. ‘[The rise] does indicate there is physical tightness in the market for gold for immediate delivery,’ said Jon Butler, analyst at Mitsubishi. The move comes as Indian gold demand picked up in July, with shipments of gold from Switzerland to India more than trebling. Most of that gold is likely to originally come from London before it is melted down into kilobars by Swiss refineries, according to analysts.” “If the calculations above are correct about the 500,000 Good Delivery bars in the London vaults whittling down to about 130 tonnes of gold that’s not accounted for by ETFs and other known gold holders, and that’s not accounted for by the Bank of England vault holdings, then there is surely very little available and unencumbered gold right now in the London Gold Market. . .And it begs the question, why do the dealers need to borrow, and who are they borrowing from. And if the gold is being borrowed and sent to Swiss refineries, and then shipped onward to India (and China), then when will the gold lenders get their gold back.” Ronan Manley, Bullion Star, 9/7/2015 Please see R. Manley’s How many Good Delivery gold bars are in all the London Vaults?
Editor’s Note: The situation we are experiencing at the moment in the gold market is reminiscent of the period around 2002 just before the gold market broke to the upside. At the time, there were shortages in London and the Bank of England was forced into sales, in my view, to cover delivery problems being experienced by the bullion banks. As the BoE selling cleared the market, the price began to rise and developed into the first leg of gold’s secular bull market – a long bull market I see as still in force today. If you take the time to read Ronan Manly’s lengthy article, you will see that he features the large tonnages being turned over at the refineries primarily in Switzerland. Some of that big number is probably from double counting – the result of 400-troy ounce London good delivery bars being converted to kilo bars for sale principally to China, but also to India. The important point to understand is that the double counting reflects how quickly the bars are being turned over – further reflection of the super-charged velocity at work. China and India are saying, “At these prices, we will take all you’ve got as quickly as you can get it to us.” One should not overlook the effects of stymied production, particularly in South Africa, as further complicating the physical supply-demand picture and something with which the market will have to contend in the months ahead. Client demand at USAGOLD: I should emphasize that, with the exception of silver Canadian Maple Leafs and a few other products, USAGOLD is not experiencing the same delivery problems often cited by other bullion firms. Due to our experience dealing with tight market conditions in the past, we stockpiled, and continue to stockpile, significant inventory in most of these items and have, for the time being, continued to operate as normal – albeit at increased premiums. Our delivery times have not changed on most products – at least not as of this writing. Our position, however, could change overnight particularly when you blend into the equation the strong, industry-wide demand we are experiencing. One of two things must happen to level this market. Either premiums to spot for both gold and silver will continue to push higher as the physical markets try to normalize the imbalance between supply and demand by setting their own prices, or the paper price will be forced rapidly higher to achieve the same end. Either way, such extreme imbalances between supply and demand cannot persist into perpetuity and will translate to the price one way or another. I have been asked on many occasions how I would distinguish the contemporary gold market from earlier versions. The biggest change, in my view, has been the widespread, in fact, global acceptance of gold (and now silver) as viable alternatives to other forms of investment and savings. That acceptance in many instances is well-entrenched and difficult to undermine. The other change I consider to be crcuial has been the invention and growth of the world wide web as a source of information. Through it, the ordinary investor has been able to get the other side of the story on gold and for many that message is compelling. Generally speaking, the individual who buys gold and silver is not puzzled, for example, by the popularity of presidential candidates completely detached from the professional political class. This group, global in scope, simply sees declining prices as a buying opportunity – an opportunity to hedge the portfolio at less of a cost. That is the psychology stubbornly and efficiently at work in the gold market today – even now as you read this issue of our newsletter. I would like to thank Koos Jansen at Bullion Star whose article, “It’s virtually impossible to get physical gold in London“, served as a source for much of the material republished above.
Reflection #2 Traditional IRAs, 401Ks in digital warfare’s line of fire (Conversations with a spy) Only one person has ever been director of both the National Security Agency and the Central Intelligence Agency. That person is retired Four-Star General Michael Hayden. Recently I had the chance to talk to Mike Hayden on Capitol Hill. We were both there as part of a conclave to discuss the status of Iran-U.S. negotiations on uranium enrichment. We had a chance to talk one-on-one about my specialty, which is financial warfare, and the potential impact on investors. . . For investors, the implications of this new age of financial warfare are profound. Stock and bond markets have always been affected by wars. But the wars were fought elsewhere – stocks and bonds merely adjusted in price to the new state of the world. Today, markets are not bystanders; they are ground zero. It’s fascinating to meet brilliant military and intelligence officials like General Hayden who are rapidly absorbing the fact that wars are now fought in financial markets rather than on physical air, sea and land. The military and intelligence communities are absorbing the new reality, but most investors are still behind the curve. Traditional stocks and bonds are digital assets that can be hacked, wiped-out or frozen with a few keystrokes. It’s important to allocated part of your portfolio to physical assets that cannot be wiped out in financial warfare. These assets include silver, gold, fine art, land, rare stamps, cash (in banknote form, not bank deposits) and other physical stores of value. For the portion of your portfolio that is in stocks, it is helpful to consider venture capital and start-up companies where your ownership is in the form of a written contract, not a digital account. My conversation with General Hayden reinforced my already strong view that financial warfare is here and digital assets such as brokerage accounts and 401(k)s are in the line of fire. James G. Rickards, Darien Times, 2/7/2015 Continue Reading>>>