“Help your enemies underestimate your capabilities”. This is what
Sun Tzu, the Chinese general, wrote in the famous military strategy book The
Art of War.
This military strategy is perfectly applicable today to the gold market.
The Western press and pundits for the current financial status quo are doing
all they can to divert investors from physical gold (this only works in
Western nations). Two tactics are being used to implement that strategy:
Publishing articles where the explosion of global physical demand is never
mentioned and direct manipulation of precious metals spot prices by financial
engineering, notably on the COMEX, through massive selloffs of futures at the
most illiquid times of the market.
This article from Le
Figaro titled “Les cours de l’or poursuivent leur dégringolade”,
meaning that the gold price keeps tumbling is a fine example of the media fog
intended to blur the vision of investors.
The result of that strategy that has been in place for several years is
that the spot (paper) price of precious metals is now below the cost
of their extraction, which is an aberration in a context of
exploding global demand (cost of extracting 1oz of silver: $16.50), and that
investors’ sentiment is at its lowest.
Let’s clear some of that disinformation fog by stating a few recent events
and by asking a very simple question of economics logic:
- The law of supply and demand, which helps determine the price of an
asset, makes it impossible for the price of an asset to decline in a context
of strong demand. Everyone can understand this concept.
How can economists and “specialised” financial journalists talk
about the price decline in precious metals with such aplomb, while global
demand for physical gold and silver has literally exploded these last few
years?
How can they explain this distortion in the law of supply and
demand? This manipulation of physical reality?
Here are a few recent proofs of the explosion of global physical demand:
- The U.S. Mint has stopped the production of its flagship Silver
Eagles. Though this halt is temporary, it could not happen if demand
for physical silver wasn’t “enormous”. Legally, the U.S. Mint has to supply
as many silver coins as it can produce, and it cannot ration its production
if it has the capacity to produce coins and that demand requires it. So,
let’s again ask the question: How can the spot price of silver be so low
while the U.S.
Mint is announcing a production halt due to problems with silver supply?
Can the actual price determination mechanism process be considered
credible in this context?
Let’s continue...
- As the silver price was declining in October, and before the U.S. Mint
announced it was running out of silver, investors bought 1.4
million Silver Eagles in two days.
- 2014 is on the way to become a record-setting year for sales of
Silver Eagles, due to order volumes. Demand is not only “strong”, it
is historically high. Once again, how can strong demand combined with a
diminishing supply translate into low prices?
- Russia, which already had the world’s fifth largest gold reserves,
bought more physical gold this year than it did since the last crisis of
1998. Russia bought 37.2
tonnes of physical gold in September 2014. In twenty years, Russia had
never owned as much physical gold.
How can precious metals prices decline in this context?
I don’t even have to mention record imports from China and India in order
to prove that global physical demand for gold and silver is
“enormous”, especially coming from Asia.
Chinese imports via Hong Kong: 68.6 tonnes for the month #China #gold #imports pic.twitter.com/a6KbrJtBFm
— GoldBroker (@Goldbroker_INT) November
7, 2014
One does not need to be a financial expert to understand that something is
awry in the determination of the price of precious metals. And this has been
going on for several years, but tensions on the physical markets were not as
apparent as they are now.
I have often stated my point of view regarding the reason of the decline
in spot prices: Manipulation. And Chris Powell, from the
Gold Anti-Trust Action Committee (GATA), does a wonderful job of explaining
this mechanism in this video:
Up to this day (Wednesday November 12, 2014), not a single bank had
been accused of precious metals benchmarks manipulation.
It sure has been a long wait, but FINMA (Swiss regulating authority), has
accused UBS of
manipulation and fraud on the precious metals markets.
The point I wanted to stress in this article in a comprehensive manner is
that strong physical demand is not compatible with the decline of an
asset price. I think everyone can understand that.
The price decline of these last few years is due to manipulation
that BAFIN (German financial authority) and FINMA have revealed officially.
The spot prices of gold and silver do not represent the real value
of the physical metals.
Gold and silver investors in the West are stuck in the middle of a
media/psychological war, but the events I stated above should
reassure them regarding the absurdity of the precious metals price fixing
mechanism, said mechanism being on the way out.
One has thus to be patient and wait for the physical market to
come back to its role of main price determinant.
Which event could trigger this evolution? Some break in the physical
market, such as:
- A publicised delivery default on a "gold" paper contract that
will prove that there is much more paper gold/silver in circulation than
there are physical quantities available.
- An announcement by China of the exact amount of its physical gold
reserves followed by a request from China for the United States to prove its
own physical gold reserves.
- A YES vote on the Swiss
Referendum on gold to be held November 30, since it would force the Swiss
National Bank to buy physical gold directly on the markets (20% of its
foreign exchange reserves) and, above all, to repatriate its gold, when we
know that Germany only recuperated a very small amount of its gold stored in
the USA, in London and in France. In other words – and this relates to my
first point – repatriation/delivery default of physical gold.
The end of manipulation will be triggered by an event on the
physical market which will reveal that physical gold (or silver) is
everything but “physically” available in quantities proclaimed.
And last, but not least, here is a last indicator coming from a former
(money printing) Fed chairman:
- Alan
Greenspan recommends buying gold...