I’ll bet the title of this article sounds absolutely nutty to anyone who follows the gold market. As any “gold bug” can tell you, the price of gold is down from a high of $1,024 earlier this year to a current price of $734 per ounce. Similarly, there’ve been virtually no silver bullion coins for sale for most of three weeks, and no gold bullion coins available for sale for one week. The price is clearly down and there’s a demonstrable shortage in the supply of gold bullion coins, so the title must be some kind of joke, right?
Nope. I meant every word in that title and I’ll show you why they’re true in the balance of this article.
Since last July, I’ve told folks to get out of paper. I’ve told ‘em that all forms of “paper wealth” are mere debt instruments—promises to pay rather than actual payments. I’ve told ‘em that the total American debt (that owed by national, state and local governments plus private debt on mortgages, auto loans, Master Cards, etc.) is at least $75 trillion. I’ve said that if you divide that total debt by the total U.S. population (300 million), you wind up with an average or “fair share” of $250,000 in debt for every man, woman and child. I’ve guesstimated that, at most, we might be able to repay an average of $50,000 for every man, woman and child. If I’m right at least 80% ($200,000 out of every $250,000 “fair share”) of the total American debt can’t ever be repaid.
I’ve postulated the obvious: What can’t be paid, won’t be paid.
I’ve concluded that at least 80% of all paper debt instruments memorializing the existing debt must be repudiated by bankruptcy, inflation, currency devaluation or by killing the creditors (you and me) with WWIII.
I don’t expect WWIII. I don’t believe the system will admit it’s bankrupt (even though that’s true) except at the point of a bayonet. That leaves inflation and currency devaluation (a new dollar of some sort) as the most likely means to repudiate the existing debt.
Or maybe the majority of the American debt will simply be repudiated in one horrific crash wherein at least 80% the perceived value of virtually all paper debt instruments is simply and suddenly wiped out.
In fact, the “one horrific crash” has already been taking place throughout most of the past year. The stock markets have lost at least $7 trillion since January 1st. The housing market lost an estimated $6 trillion over the past two years—and conservative estimates predict future housing losses of at least another $3 trillion.
A compelling argument can be made that the U.S. economy is currently hemorrhaging (repudiating) almost $1 trillion in paper “wealth” per month. Gov-co proposed a $700 billion bail-out that’s now grown to $1.3 trillion “rescue fund” to deal with the problem. But if we’ve already lost $10 trillion this year, what are the odds that injecting a “mere” $1.3 trillion into the economy will solve or even mediate our problems?
Just as I’ve predicted, the value of paper debt instruments (mortgages, stocks, bonds, retirement funds, etc.) is being dramatically repudiated. It’s true that we’ve not yet seen an average repudiation of 80%—and hopefully, we never will. But, on average, we’ve seen at least 25% of the value of existing paper debt instruments disappear—so far.
The Fall in the (“spot”) Price of Gold
The massive repudiation of American debt even goes to the gold market where the moment-to-moment “spot” price is calculated based on COMEX futures buy and sell orders. Most people suppose the currently falling COMEX spot values for gold and silver are the true current value for physical gold and silver—but they’re wrong.
Why? Because COMEX gold is a form of debt whereby one party merely promises to sell a fixed quantity of gold at a fixed future date in return for a fixed sum of currency. Thanks to the miracle of modern financial razzle-dazzle, the person selling gold and making the promise need not actually have the quantity of gold he promises to provide.
For example, suppose I thought the (“spot”) price of gold was going up to say, $1,000 per ounce by next December. I could offer to purchase a COMEX futures contract today wherein I would promise to pay $900 per ounce for gold next December in hopes that I could make a $100/ounce profit. In other words, if I could find some fool who’d contract today to sell me gold at $900 an ounce next December when the real price was $1,000 an ounce, I’d make a $100/ounce profit.
You, on the other hand, might be convinced that, come December, the spot price of gold could not be higher than $800 per ounce. If so, you’d want to contract to sell gold to some fool (me, perhaps) who was willing to guarantee that he’d pay $900 for the $800/ounce gold. If you could find such a fool, come December, you’d make a $100 per ounce profit.
A salient feature of the COMEX market is that most buyers don’t take delivery on the commodities they’ve purchased in the futures market. (Lots of folks speculate on “pork bellies” who wouldn’t know one if it fell on their heads.) In other words, when I contract to buy gold for $900 per ounce and you contract to sell gold for $800 an ounce, only rarely will either one of us actually deliver or take delivery of actual physical gold. If our futures contract is scheduled to be executed in December, when December rolls around, one of us will make a little (or maybe a lot) of currency; the other will lose a little (or a lot) of currency. We will take our “winnings” (or pay our “losings”) in the form of a check rather than physical possession of the gold. For us, the COMEX gold futures market is simply a casino without the benefit of scantily-clad waitresses and free drinks.
Good as Gold?
Like all forms of debt, a COMEX futures contract is only as good as the promise of the counterparty behind the contract. Today, low margin requirements allow sellers of gold futures to contract when they only have enough gold to cover 10% of the gold promised actually stored in COMEX warehouses. I.e., I could legally offer to sell you 10,000 ounces of gold next December if I had just 1,000 actual ounces delivered into the gold warehouse. Therefore, if a man contracts to sell 10,000 ounces of gold next December, that contract is only as good as that man’s promise to actually have and provide the 10,000 ounces of gold.
That’s not a problem—so long as most purchasers don’t take actual physical delivery of the gold. So long as buyers want and accept checks rather than actual delivery of gold, a mere promise to produce 10,000 ounces of gold next December—backed by my initial delivery of 1,000 ounces (10%) to the COMEX warehouse—is deemed to be “good as gold”.
This system of contact sales based on mere promises works fine—so long as virtually everyone who buys a gold futures contract takes a check rather than gold. But if 1) there wasn’t actually as much physical gold for sale as is indicated by the futures market; 2) the price of physical gold were to increase dramatically; and 3) if the buyers decided to take delivery of the physical gold they’d contracted to buy, then 4) the whole gold futures market might implode.
The fundamental question is this: How many of the people who’ve contracted to sell 10,000 ounces of gold actually have 10,000 ounces of gold to sell? So long as the buyers are content to take their profits in the form of checks, no one has bothered to ask whether the sellers really had 10,000 ounces they promised to sell.
The Gold Anti-Trust Action Committee (GATA) has argued for a decade that the gov-co and central banks have manipulated the COMEX futures markets to suppress the price of gold. “They” (the “system”) would put up 10,000 ounces of gold and offer to sell 100,000 ounces of “paper” gold at a price well below a true free market price for physical gold. Other members of the “system” would take their offer and agree to purchase the gold for the reduced price. The net result trade between “insiders” would be that the system (thanks to a 10% margin requirement) would only have to put up 10,000 ounces of gold to control the price of 100,000 ounces of “paper” gold. (Or, they could put up 100,000 ounces to control the price of 1 million ounces, etc..)
So long as “they” were trusted, they didn’t necessarily need to have as much gold as they purported to make available for sale. “They” could effectively “bluff” by betting one price of gold with so many purported ounces of gold that no one dared to call their bluff and find out if they really had as much gold as they bet. And, if they sold to co-conspirators who never demanded delivery of the gold, the COMEX market for paper-futures gold could be manipulated and the true price of physical gold could be suppressed.
Again, this scheme works just fine unless 1) “they” are bluffing and don’t have as much gold to sell as they profess; and 2) a significant percentage of buyers opt to “call the bluff” and take physical delivery rather than accept payment in the form of a check.
Two Markets; Two Prices
Current market circumstances indicate that we’ve reached a moment where growing numbers of “buyers” want physical delivery of gold rather than “payment” by check. Those circumstances are two seemingly contradictory phenomenon: 1) the price of gold on the COMEX “spot” market is falling; and 2) the physical supply of gold is also falling. At first glance, under the classical rules of Supply and Demand, it should be impossible for these two phenomenon to occur simultaneously. When the Supply of any commodity (like wheat, oranges, pork bellies or gold bullion coins) falls, the price should increase rather than decrease.
Today, the supply of gold bullion coins has virtually disappeared (as have silver bullion coins). The price of gold should be up. The spot market nevertheless says the prices are down.
How can this be?
Two different markets. People have believed that the “spot” price for gold (as determined primary by COMEX) was the one and only true price for all things gold. That belief was false. The COMEX “spot” price is the price of “paper” gold—the price of gold futures contracts (paper debt instruments)—but not the real price of physical gold.
So, if my earlier theory (“what can’t be paid, won’t be paid”; 80% of all paper debt instruments must, on average, be repudiated) is roughly correct, then even the price of “paper” gold debt instruments (futures contracts) on the spot market must fall dramatically. Conversely, at the same time, the price of real or physical gold must rise.
Is the price of physical gold rising? Of course. Yes, indeed. Right now, the prices of physical gold and silver are RISING.
Proof? People who have physical gold are increasingly unwilling to sell at the “spot” price. Growing numbers of people holding physical gold are simply laughing at those who offer to buy gold at today’s “spot” price of $734. Increasing numbers of people are convinced that the true price for physical gold is much higher—maybe double, maybe more—than the spot price. Therefore they won’t sell at the spot price and—therefore—the supply of physical gold (and silver) has seemingly disappeared.
The idea that there are two markets—one spot for “paper” gold and one “free” for physical gold—lies at the foundation of GATA’s decade-long campaign to expose the fact that the price of gold has been manipulated. Any time there’s market manipulation, you have two markets: the manipulated or “spot” market and the true, physical free market. Physical gold and silver are still in circulation. You can buy all you want. There is no gold shortage—there’s only a shortage of gold for $735 per ounce. You can’t get physical gold for the “spot” price because the sellers know very well that the true price of physical gold is much, much higher.
It’s like buying a new Cadillac. Suppose I’d tried unsuccessfully to buy a new Cadillac from every dealer in Dallas. I could therefore breathlessly report that GM had gone bankrupt and there were no more Cadillac s for sale! You might react by saying, “Omigosh, the economy is worse than I thought: there’s no more Cadillacs for sale!”
But what if I went on to explain that I was only offering to pay $5,000 for a new Cadillac?
Then you’d say, “Why you darn fool, of course you can’t buy a new Cadillac for $5,000!” And you’d realize that there was no shortage of Cadillacs—only a shortage of new Caddy’s at the price of $5,000. If you want to pay $50,000, you can buy all the Caddy’s you can count. But if you insist on paying only $5,000, there is absolutely a “Cadillac shortage”.
Same thing with physical gold. Want to buy gold? You can buy all you want—but not at the price of $734 per ounce. At $734 per ounce, there is almost no gold for sale. At $1,200 an ounce, you can buy enough gold to fill a dump truck.
Up, Up and AWAAAAY!
The price of physical gold is going up—right now. Proof? Again, people aren’t willing to sell at spot. You can buy all the physical gold you want for $1,100 or $1,200 an ounce. You can’t buy at $734. The problem is not one of physical supply. The problem is one of price.
At $1,100 to $1,200 an ounce on the free market for physical gold, gold has, right now, reached its highest price ever. And it’s going higher.
For a generation or more, people mistakenly accepted the idea that the manipulated “spot” price for “paper” gold was also the true price for physical gold. But today, when the spot price is falling and the supply of physical gold is simultaneously drying up, we see evidence that the public is beginning to realize that there are two markets. The spot price is “decoupling” from the physical price. This decoupling indicates that the two markets are in competition. (You can bet that the true free market for physical gold will soon clearly prevail over the manipulated “spot” market price for paper gold.)
Where can you find the true price for physical gold or silver? e-Bay. People are selling and buying silver eagles for $20 per coin (not the $9.50 “spot”). Others are selling and buying gold “buffalos” (one ounce, pure gold) for $1,150.
The free market is alive and well—it’s just not the COMEX (manipulated) market.
If “they” have been manipulating the COMEX spot market with bluffs rather than sufficient physical gold to satisfy their futures contracts, the futures market for gold may soon collapse, people holding gold contracts will be financially devastated, and some wheeler-dealers may even be jailed.
Current speculation is that come December, we may see sufficient buyers of gold futures contracts demand delivery of physical gold to expose the bluff and collapse the entire market. Such collapse is absolutely possible since the biggest current sellers of gold futures contracts are troubled financial institutions that are already insolvent. Given that insolvency, COMEX gold futures contracts now carry enormous risks. (We can no longer rely on the seller’s promise to produce the gold when the futures contract is supposed to be executed.) Perhaps these troubled financial institutions will find a way to provide whatever gold was promised. But if they fail, the gold futures market will suffer a systemic collapse. Some estimate that if even a one-fourth of outstanding contracts demand physical delivery, the gold futures market will collapse.
Insofar as a financial collapse outside the gold futures market increases the risk of total default, COMEX gold futures fails miserably as a safe haven. Recognition of future contract risks probably explains why COMEX (paper) gold prices are falling, while physical gold is disappearing from the market place.
Because of current scarcity (at $735 an ounce), physical gold is selling at an enormous “premium” over the COMEX spot price. For example, eBay 2008 gold buffalos (bullion coins) are trading between $300 to $400 over spot price. With the current spot price at $734, that’s a 40% to 55% “premium”.
I contend that the eBay price does not reflect a “premium” based on shortages in supply. I contend that these “premiums” reflect the true, free market price of physical gold. If the difference between the “spot” prices for future/paper “gold” and eBay prices for physical gold continue, a huge number of December gold contract holders will demand physical delivery.
And why not? How much gold would you buy at any price on a manipulated market where the price was artificially low, if you knew that you could instantly resell your gold on eBay (the free market) for 40% to 55% more than you paid? If the gold “premiums” persist in the physical (free) market on eBay, the resulting demand to take physical delivery for gold off the COMEX futures market will cause systemic defaults in the gold futures markets.
Even if the gold futures market survives, awareness of the disparity between the spot and physical prices of gold is likely to grow and cause a rush of into physical gold. If so, some think the price of physical gold could easily skyrocket to over $2,000 in a matter of days.
Whether such predictions will manifest remains to be seen. This much is true: The supply of gold bullion coins has dried up at the same time the price of gold is falling. That seemingly defies several centuries of classical Supply and Demand theory. Something bizarre is happening, and it can’t continue much longer. The smart money (those holding gold) say gold is going to rise dramatically in price, and probably not too long from now. If that weren’t true, they’d be selling their gold and there’d be no shortage of supply.
I believe the “smart money” is right. If you have gold, hold it. If you can find anyone who’ll sell, buy it.
P.S. And one other point: If the previous analysis is roughly correct, at current “spot” price of $734 per ounce, you can purchase numismatic gold coins (MS-61, MS-62) from gold dealers at the free market (eBay) price of $1,100 to $1,200 for bullion gold. That’s one helluva buying opportunity.