One of our long-running themes here is that the truly historic and massive
flows of gold from West to East is (someday) going to stop, for the simple
reason that there will be no more physical bullion left to move.
It’s just a basic supply vs. demand issue. At current rates of flow,
sooner or later the West will entirely run out of physical gold to sell to
China and India. Although long before that hard limit, we suspect that
the remaining holders of gold in the West will cease their willingness to
part with their gold.
So the date at which “the West runs out of gold to sell” is somewhere
between now and whenever the last willing Western seller parts with their
last ounce. As each day passes, we get closer and closer to that
fateful moment.
This report centers on preponderance of fascinating data revealing the
extent of the West's massive dis-hoarding of physical gold, for the first
time, begins to allow us to start estimating the range of end-dates for the
flow to the East.
Here’s the punchline: there’s an enormous and growing disconnect between
the cash and physical markets for gold. This is exactly what we
would expect to precede a major market-shaking event based on a physical gold
shortage.
Stopping the Flows
There are only two outcomes that will stop the process of Western gold
flowing East, one illegitimate and the other legitimate.
- It becomes illegal to sell gold.
This is the favored approach of central planners who prefer to force
change by dictate rather than via free markets and free
will. Unfortunately, this strain of political intervention
is dominant in the West, particularly in the US and EU.
- The price of gold dramatically rises. A
large increase in the price of gold will (paradoxically) cause
greater demand for gold in the West and (sensibly) less demand in the
East. This is what should legitimately happen given current supply and
demand dynamics. But it may not.
There’s always a 3rd option, we suppose: economically
carpet-bombing China and India's financial systems to scare/force some gold
back out. Consider such an approach along the ‘economic hitman’ lines of
thinking.
This would be done, for example, by having outside interests sell the
Rupee furiously, driving down its value and forcing the Indian monetary
authorities to defend it by using up foreign reserves to buy the Rupee. Then
wait for India to run out of foreign reserves and then casually ‘suggest’
that its government use gold sales to continue defending its currency.
India's leaders would have to find ways to somehow ‘coax’ gold from its
citizens. I think we can all imagine the sorts of draconian rules and
penalties that desperate governments would deploy in such a situation.
As a side note, I believe this is the same process that was used to ‘coax’
a lot of gold out of the GLD trust since 2012. After enough bear raids on the
price of gold, which began somewhat suspiciously almost exactly on the date
that QE3 was announced, Western gold ‘investors’ lost interest in the yellow
metal, sold their GLD shares in droves, and hundreds of tons of gold were
liberated from that stockpile.
What is truly odd from a chart perspective: this hammering down of gold
started just after it had broken to the upside out of a textbook perfect
triangle, when it looked seemingly ready to head off to higher values:
But in the days immediately following the QE3 announcement, gold shed
$100, then barely recovered, and just wandered lower until it was violently
slammed from $1550 to $1350 over one night (of course) in
April 2013.
Now this was highly fortuitous for the ever-lucky Federal Reseve. After
launching the largest money printing campaign in US history, the Fed did not
need gold heading any higher, possibly providing a signal that would cast doubt
on the wisdom or possible effectiveness of its easy-money policies. Policies,
mind you, that the years since have proven to do little more than enrich the
banker class and the 0.1%, as well as lard the system with extraordinary
levels of new indebtedness and liquidity.
The Fed Indeed Cares About Gold
Gold, when unfettered, has a habit of sending signals that the Fed really
doesn’t like. Therefore the Fed is at the top of everyone’s suspect list when
it comes to wondering who might be behind the suspicious gold slams. Whether
the Fed does it directly is rather doubtful; but they have a lot of useful
proxies out there in their cartel network.
To reveal the extent to which gold sits front and center in the Fed’s
mind, and how they think of it, here’s an excerpt from a 1993 FOMC meeting’s
full transcript. Note that the full meeting notes from Fed meetings are only
released years after the fact. The most recent ones available are only from
2009. Listen to what this FOMC voting member had to say about gold:
At the last meeting I was very concerned about what commodity prices were
doing. And as you know, they got lucky again and told us that the rate of
inflation was higher than we thought it was.
Now, I know there's nothing to it but they did get lucky. I've had plenty
of econometric studies tell me how lucky commodity prices can get. I told you
at the time that the reason I had not been upset before the March FOMC
meeting was that the price of gold was well behaved.
But I said that the price of gold was moving. The
price of gold at that time had moved up from 328 to 344, and I don't
know what I was so excited about! I guess it was that I thought the price of
gold was going on up. Now, if the price of gold goes up, long bond rates will
not be involved.
People can talk about gold's price being due to what the Chinese
are buying; that's the silliest nonsense that ever was. The
price of gold is largely determined by what people who do not have trust in
fiat money system want to use for an escape out of any currency, and they
want to gain security through owning gold.
A monetary policy step at this time is a win/win. I don't know what is
going to happen for sure. I hope Mike is correct that the rate of inflation
will move back down to 2.6 percent for the remaining 8 months of this
calendar year. If we make a move and Mike is correct, we could take
credit for having accomplished this and the price of gold will soon be down
to the 328 level and we can lower the fed funds rate at that point in time
and declare victory.
(Source
– Fed)
There it is, in black and white from an FOMC member’s own mouth spelling
out the primary reason why I hold gold: I lack faith in our fiat money
system. He nailed it. Or rather, I have very great faith that
the people managing the money system will print too much and ultimately
destroy it. Same thing, said differently.
And of course the people at the Fed are acutely aware of gold's
role as a barometer of people’s faith in ‘fiat money.’ Of course they track
it very carefully, discuss it, and worry about it when it is sending ‘the
wrong signals.’ I would, too, if in their shoes.
The Federal Reserve Note (a.k.a. the US dollar) is literally nothing more
than an idea. It has no intrinsic value. America's money supply is just
digital ones and zeros careening about the planet, accompanied by a much
smaller amount of actual paper currency. The last thing an idea needs is to
be exposed as fraudulent. Trust is everything for a currency -- when that
dies, the currency dies.
The other thing you can note from these FOMC minutes is that gold pops up
19 times in the conversation. The Fed members are are actively and
deliberately discussing its price, role in setting interest rates, and the
psychological impact of a rising or falling gold price.
Later in that same meeting Mr. Greenspan says:
My inclination for today--and I'm frankly most curious to get other
people's views--would be to go to a tilt toward tightness and to watch
the psychology as best we can. By the latter I mean to watch
what is happening to the bond market, the exchange markets, and the price of
gold…
I have one other issue I'd like to throw on the table. I hesitate to do
it, but let me tell you some of the issues that are involved here. If we are
dealing with psychology, then the thermometers one uses to measure it have an
effect. I was raising the question on the side with Governor Mullins of what
would happen if the Treasury sold a little gold in this market.
There's an interesting question here because if the gold price
broke in that context, the thermometer would not be just a measuring tool. It
would basically affect the underlying psychology. Now, we don't have
the legal right to sell gold but I'm just frankly curious about what people's
views are on situations of this nature because something unusual is involved
in policy here. We're not just going through the standard policy
where the money supply is expanding, the economy is expanding, and the Fed tightens.
This is a wholly different thing.
The recap of all this is that the Fed watches the price of gold carefully,
frets over whether the price of gold is ‘sending the right signals’ to market
participants, and pays attention to gold's impact on market psychology (with
an eye to controlling it).
In short, the Fed keeps a close eye on the "golden thermometer".
Back to the supply story for gold. Not long after gold began its
downward price movement in 2012, the GLD trust began coughing up a lot of
gold, eventually shedding more than 500 tonnes; a truly massive amount.
(Source)
In my mind, the absolute slamming of gold in 2013 was done by a few select
entities and represents one of the clearest cases of price manipulation on
the recent record. While we can debate the reasons ‘why’ gold was
manipulated lower or ‘who’ did it, to me, there’s no question about how
it was done. Or that it was done.
Massive amounts of paper gold were dumped into a thin overnight market
with the specific intent of driving down the price of gold.
It’s an open and shut case of price manipulation. Textbook perfect.
Even if these bear raids were performed by self-interested parties that
made money while doing it, you can be sure the Fed was smiling thankfully in
the background and that the SEC wasn’t going to spend one minute looking into
whether any securities laws were broken (especially those related to price
manipulation). Gold's falling "thermometer" was exactly what the
central planners wanted the world to see.
Down and Out
The paper markets for gold are centered in the US, while the physical
market for gold is centered in London (but increasingly Shanghai). It’s
safe to say that the paper markets set the spot price, while the physical
movement of gold originates in London.
What’s increasingly obvious is the growing disconnect between the paper
and physical markets. This is exactly what we’d expect to see if the paper
markets were pushing in one direction (down) while physical gold was heading
in a different direction (out).
The tension between these ‘down and out’ movements is building and, according
to a senior manager of one of the largest gold refineries in the world
located in Switzerland, the current price of gold “has no correlation to
the physical market.”
He notes a lot of on-going tightness in the physical market.
Unsurprisingly, gold is moving from West to East with vaults in London
supplying much of the physical metal that's being refined into fresh kilo
bars and sent off to China and India.
But given the astonishing amount of physical demand, why has the price of
gold been heading steadily lower over the past several years?
The aforementioned Swiss refiner is equally perplexed:
If I am honest, the only thing I could share now with you would be that
I’m perplexed about the discrepancy between the prices and the situation of
the physical market. This is something I still do not understand and is a
riddle for me every day. For all people who are interested in precious
metals, the physical side of this business should be given more emphasis.
(Source
– Transcript)
There’s no mystery as to demand going up in China and India as the price
went down. Interested buyers will buy more at a lower price.
But its a big mystery as to why Western “investors” seem more interested
in selling gold than buying it right now.
Evidence of Physical Tightness
Besides the first-hand experience of the Swiss refiner, there have been
numerous stories in the main stream press also pointing to tightness in the
London physical gold market as well as relentless demand from China and India
being the driver of that condition:
Gold demand from China and India picks up
Sep 2, 2015
London’s gold market is showing tentative signs of increased
demand for bullion from consumers in emerging markets, after the price of the
precious metal fell to its lowest level in five years in July.
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.
In the first half of this year, total recorded exports of gold
from the UK were 50 per cent higher than the first half of 2014, on
a monthly average basis, according to Rhona O’Connell, head of metals for
GFMS at Thomson Reuters. More than 90 per cent was headed for a combination
of China, Hong Kong and Switzerland.
London remains the world’s biggest centre for trading and storing
gold.
(Source)
Shipments and exports are up very strongly and nearly all of that gold is
headed to just two countries; China and India.
India Precious Metals Import Explosive – August Gold 126t, Silver
1,400t
Sept 10, 2015
In the month of August 2015, India imported 126 tonnes of gold and
1,400 tonnes of silver, according to data from Infodrive India. Gold
import into India is rising after a steep fall due to government import
restrictions implemented in 2013.
Year-to-date India has imported 654 tonnes of gold, which is 66 %
up year on year. 6,782 tonnes in silver bars have crossed the Indian border
so far this year, up 96 % y/y.
Gold import is set to reach an annualized 980 tonnes, which would be up 26
% relative to 2014 and would be the second highest figure on (my) record – my
record goes back to 2008.
Silver import is on track to reach an annualized 10,172 tonnes, up
44 % y/y! This would be a staggering 37 % of world mining.
(Source)
With China and India’s combined appetite for gold being higher than total
world mining output, it only stands to reason that somebody has to be parting
with their physical gold and those entities appear to be substantially
located in the US and UK.
When There's No More To Sell, There's No More To Buy
All the above evidence of a tightening physical market for gold is just
the tip of the iceberg.
In Part 2: Why Gold Is Headed Higher & May Be Unavailable At
Any Price we look at the frightening inventory declines in bullion
storage that the LBMA and the COMEX have experienced over the past year.
We then lay out how this deliberate suppression of gold prices by the central
planners is destined to end: with MUCH higher prices for gold, and much less
availability. In fact, there is high likelihood we will experience a point at
which it may be nearly impossible for the average investor to acquire
physical gold, as there will be no sellers willing to part with it.
Click here to read Part 2 of this report (free
executive summary, enrollment required for full access)
