Friday, May 17, 2013

Mystery: Paper Gold Price Dropping while Physical Demand is Increasing

OK, Rik don't panic.  We expected this.  Prices for paper gold and silver will tumble when the paper markets start to dislocate from the physical markets.  Clearly if investors perceive a chance of default at the COMEX and GLD and SLV then they will price in that risk.  The question then is; are the paper markets really dislocating or can one acquire physical bullion for the paper prices?

A quick survey of several internet coin dealers shows that yes, you can buy bullion at the current paper market prices plus the typical commission.  Dealer commissions cover their cost of shipping and handling as well as profit.  But, retail sales of bullion in the US are a small portion of gold demand.  The bullion banks could temporarily supply US retail demand to avoid revealing a pending market default and prevent a run on the exchanges physical bullion.  Anecdotal evidence of physical gold shortages in India and China are numerous.  But, it is central bank activity that really moves the needle.  Reliable information about central bank buying and selling is not available.  We mere citizens cannot even force an audit of our own governments current precious metals holdings.

Data regarding bullion inventory at COMEX warehouses, JP Morgan and other bullion banks' accounts, and GLD and SLV is available daily.  The data does show that inventory is dropping.  However, the data is likely very misleading since any and all claims on that bullion are not clear.

So it is still a mystery.  How can market prices be dropping while demand is increasing and inventory dropping?

Nations, except China are still broke and printing more and more fiat.  Precious metals are still a good store of wealth.  Gold and silver paper market prices are very volatile.  Gold prices moved up and down $200 per ounce within a couple weeks several times in 2011 and 2012.

In October 1939, Winston Churchill gave a short radio address and spoke about whether Russia would join the Allies to fight Hitler.  The portion that most remember is "It (Russia) is a riddle wrapped in a mystery inside an enigma."  However, the quote continues " . . . but perhaps there is a key.  That key is Russian national self interest."   In other words to predict Russian actions one need not know who, why or how just what is best for Russia.

I don't know who, why or how precious metals prices are dropping but it is in the best interest of those who are short, such as the bullion banks (e.g. JP Morgan) and governments who fear an alternative to fiat currencies. Since these bullion banks and governments are running the paper markets, we should expect even more attacks.  And, we should expect even less enforcement of laws and regulations.  The 'Noteable' sidebar has links to two good articles about recent lapses in enforcement or existing regulations in the paper gold and silver markets.

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