With the financial experts claiming, some gleefully, that gold has "lost its
safe haven status" in the aftermath of its biggest tumble in 30 years, many
commentators thought (hoped?) that the dramatic price drop would steer people
away from gold ownership. To my eyes, the past week has all the earmarks of
a high-gloss propaganda campaign complete with well-placed anti-gold stories
in the media and the careful use of language aimed at sowing doubt about gold's
ability to be a store of wealth.
But for those who consider gold a store of value, the recent gold slam is
a gift: an invitation to purchase more sound money with fewer units
of paper currency. In other words, a sweet deal. Gold and silver on
sale and the world is taking advantage.
As predicted last
Friday, I wrote, "[k]nowing the lower prices will only exacerbate this
West-to-East flow [of gold], I therefore thought that the bullion banks and
central banks would not have dared push that dynamic any further."
Well, by all accounts, the flow of gold from West to East is now accelerating.
Gold
Rout Heralds 'Hot' Indian Wedding Jewelry Season
Apr 16, 2013
Bullion tumbled 9.1 percent yesterday, the biggest loss since 1983, and
that may make the precious metal more affordable to Indians, said Mehul Choksi,
chief executive officer of Gitanjali, the nation's biggest retailer of jewelry
and diamonds by sales. The plunge has already revived interest among retail
buyers, said Rajesh Mehta, chairman of Rajesh Exports Ltd.
"The season is very hot for buying" with weddings and other auspicious dates
coming up, Choksi said. "The decline will be positive for jewelry as there
will be a pick-up in demand because affordability will increase. Volumes
will increase."
"We rushed to buy as soon as we saw prices fall so much and decided
to buy jewelry early for our daughter's wedding in January," said Blossom
D'souza, while browsing through a selection of bangles in a jewelry store
in Mumbai's Chira Bazaar area. "Now we can buy more gold within our budget."
Doh! Unintended consequences are piling up already, as people in India gleefully
accumulate more gold at lower prices.
And this, regarding Australia:
The Perth Mint reports that retail customers are increasing purchases
at a record rate even as gold slumps to a 21 month low. As the experts
were proclaiming the "Death of Gold", the Perth Mint website recorded the
highest activity of the year and one of the best days of the past year.
Bargain prices on gold and silver have greatly increased the demand for
physical gold and silver by the public. Demand for gold coins have
[sic] skyrocketed with sales of Australian gold bullion coins increasing
by 48% in the first quarter over the comparable prior year period.
(Source)
A couple of mainstream media reports linked the gold slam to increased selling
by Japanese investors, those ideas turned out to be either speculative, premature,
or both:
As
global price slumps, "Abenomics" risks drive Japan gold bugs
Apr 16, 2013
(Reuters) - When he woke up to news of a collapse in gold prices, Yujiro
Yamashita, 63, made his way to Tokyo's posh Ginza district to buy the precious
metal for the first time in 20 years.
Yamashita and other contrarian, individual Japanese investors understand
that gold is a volatile investment, but say that buying the precious metal
is better than the alternatives.
A week ago, as the yen-denominated price neared a new peak, jewelry
stores and gold merchants across Japan saw long lines of mostly older
Japanese looking to cash in on unwanted jewelry and other items that
they had held for years.
But on Tuesday, buyers outnumbered sellers by a wide margin. At Ginza
Tanaka, the headquarters shop of Tanaka Holdings, gold buyers waited for as
long as three hours for a chance to complete a transaction.
Nearby at Ginza SGC, a gold merchant, buyers had taken about 6 kg (13
lbs) of gold home by early afternoon on Tuesday. In one case, a 60-year-old
man, who asked not to be identified, walked out of the store with 500 grams
of gold for about 2.2 million yen ($22,500).
Meanwhile, the Chinese and Thai, too, are rushing to buy gold as a consequence
of the new, lower gold prices, with high sales volumes and shortages being
widely reported.
So this is a fairly large story that can be summarized in basic Econ 101 terms: Supply,
demand, and prices are all interrelated. Drop prices and demand increases,
which then lowers supply.
In the U.S., all of the dealers I talk to are reporting huge demand and brisk
buying. Silver in any form is quite hard to come by unless you want to pay
premiums of 20%+ per ounce above spot price. Delivery times are 5 to 6 weeks
out now - that's an unusual situation. If this recent slam was designed
to scare people away from gold, it did not have that desired outcome; in fact,
just the opposite.
To Make Matters Worse
There were numerous oddities in the timing of the gold and silver slam of
the past week, and among them were two notable developments in the supply chain.
Recall that the gold and silver carnage began on a Friday morning (4/12/13).
The Wednesday prior to that fateful Friday morning, one wall of the Bingham
Canyon mine began to shift more rapidly. So they took personnel safety precautions,
moved construction equipment out of the way, and prepared for a major ground
slide event. At 9:30 PM on Wednesday, that wall gave way, sloughing tens of
millions of cubic meters of earth into the operating pit:
Bingham Canyon produces some 400,000 ounces of gold and nearly 3 million ounces
of silver on a yearly basis as byproducts of copper mining. It will be several
years before the mine is back up to full operating capacity.
Normally, the news of a major mine being taken off line is a bullish sign
for the associated commodity, but not in this case. On that same Wednesday
gold and silver both went down in price. So the market completely discounted
the news.
Coincidentally, also on Wednesday (4/10/13), the Chilean supreme court suspended
Barrick Gold's Pascua Lama mine over a variety of environmental and social
concerns, and that project got relegated to years of litigation. This is a
huge mine project with probable reserves of over 18 million ounces of gold
and 700 million ounces of silver. It is now completely halted and will remain
so as lawyers battle things out in a process that most think will be several
years long.
So current and future production of gold and silver took hits last week right
before the big price drops. Perhaps this is just a very strange set of related
events, but the incongruity and timing cause me to lean towards what Robert
Di Niro said in the spy thriller Ronin: There is no such thing as
coincidence.
At any rate, whatever the case may be coincidence or not, future supply of
gold and silver will be lower than we thought as recently as Tuesday of last
week.
Something Is Burning
There has been a lot of speculation about why gold was hit so hard. The theories
range from it being "just one of those things" (i.e., normal market behavior)
to an orchestrated attack to drive down the price of bullion. I happen to fall
into that latter camp and summarized my thinking in why gold is being attacked
in yesterday's report, This
Gold Slam is a Massive Wealth Transfer from Our Pockets to the Banks.
An important question to ask in the face of such attacks is Qui bono? Who
benefits from dropping the price so dramatically and breaking faith in the
precious metals as a safe haven?
The Internet is swirling these days with rumors of a near inventory failure
at the LBMA (London Bullion Market Association), a 'too big to fail bank' of
a large sovereign country in Europe that's teetering, that needed protection
against its derivative exposure. One of these could be true - perhaps
all of them might be ; I honestly don't know yet. We have imperfect
vision into markets these days, and these are each developments that the central
powers would be doing their utmost to shield from our view.
But there's certainly a lot of smoke in the air surrounding the precious metals,
and as the adage goes, where there's smoke, there's fire.
In Part
II: Why There May Be a Lot Less Gold Than We Realize, we explore a particularly
interesting possible reason for the suppression of the precious metals. A
recent report issued by Sprott Asset Management calculates that the U.S.
has silently exported a massive amount of its gold reserves over the past
two decades.
If accurate, it puts the long-term manipulation of the gold and silver markets
into context. And it gives a reason for why breaking faith in the precious
metals at this time would be an important objective.
Click
here to read Part II of this report (free executive summary; enrollment required
for full access).
