July 28, 2013
Source: Michael Snyder, Guest Post
Is the paper gold scam about to be brutally crushed by a crippling shortage of physical gold? If so, what will that do to global financial markets?
According to the Reserve Bank of India, "the traded amount of 'paper linked to gold' exceeds by far the actual supply of physical gold: the volume on the London Bullion Market Association (LBMA) OTC market and the major Futures and Options Exchanges was OVER 92 TIMES that of the underlying Physical Market." In other words, there is a massive amount of paper out there, but very little actual physical gold to back it up. And right now, we are witnessing voracious hoarding of physical gold all over the globe. This is especially true in Asia. Just see this article and this article. All of this hoarding is putting a tremendous amount of pressure on those that have made all of these "paper promises", because the truth is that there really isn't all that much physical gold on the planet. In fact, Warren Buffett once estimated that if all of the gold in the entire world was brought into one place, it could be formed into a cube that would only be 69 feet long by 69 feet high by 69 feet wide.
As the emerging shortage of physical gold becomes increasingly apparent, the massive Ponzi scheme that the bullion banks have been running for decades is going to completely fall apart. The following is what Egon von Greyerz told King World News the other day…
Governments and central banks have, for decades, leased or sold their gold to the bullion banks. So they are very likely to own very little of the 23,000 tons that Western central banks are said to hold.
But now bullion banks also have a problem: They tried to replenish their (physical gold) coffers during the massive manipulative selling that we've seen over the last few months in the paper market.
Although they took the price down, most of the physical (gold) that was released by selling from ETFs and hedge funds was absorbed by Asia.
So the bullion banks are still massively short of physical gold.
Right now there simply is not enough physical gold out there and the bullion banks and the central planners are starting to panic. One of the individuals that really has his hand on the pulse of what is going on is billionaire Eric Sprott…
We have seen the COMEX inventories decline rapidly. We know that all of the dealer inventory on the COMEX has already been spoken for by delivery notices, so essentially there will be zero (inventory) if they ever make the delivery.
And the central planners (also) went to India and said, 'Look, you've got to do something about all of this gold buying in India.' So we've had ten different steps by the Indian government to try to curb demand — a 2% tax, a 4% tax, a 6% tax, an 8% tax, and a ruling that banks couldn't lend money for people to buy gold.
They also convinced the Jewelers Association that as of July 1st they couldn't sell gold bars and coins. Just last week there was a new rule implemented that if you are importing gold you have to prove that a certain amount is being re-exported. We've probably had ten or twelve things (restrictions) happen in six months, all of which is a huge attempt to get the second biggest buyer of gold in the world, after China, to decrease consumption because the gold isn't around.
The central planners have arranged all of these things. I think it's just been one big scheme to try to get people dissuaded from owning gold and to cause supply to come out. As you mentioned, because of it (central planner actions) we have the gold forward rates (for gold) being negative, backwardation, and inventories plunging, all of which have been manifested because there is a shortage of gold.
Already the emerging shortage of physical gold is starting to cause some very unusual things to happen in the financial markets. A recent article by Reg Howe did a good job of explaining what we have been witnessing lately…
By undercutting normal gold lease rates, these super low interest rates have forced central banks to reduce their lease rates to nonsensical levels in order to prevent gold futures from going into overt backwardation. Recall that GOFO, the gold forward rate, is the interest rate for a given maturity less the lease rate for that maturity, and that a negative GOFO represents backwardation. See Gold Derivatives: GLD and Ass Backwardation (5/24/2010); Gold Derivatives: The Tide Turns (5/25/2009).Passing the argument that widely reported premiums for spot physical delivery represent a form of backwardation, figures from the LBMA have now shown a negative GOFO at the shorter maturities for almost three weeks (July 8 through July 25) due to a surge in lease rates, which still remain below more normal historical levels.
Indeed, this unusual event has attracted considerable attention even from those outside the narrow world of gold. See, e.g., J. Skoyles, Backwardation, negative GOFO and the gold price, The Real Asset Co. (July 24, 2013); M. Kentz, Gold futures hiccup indicates demand outpacing supply, Reuters (July 19, 2013); G. Williams, What If, Things that Make You Go Hmmm, Mauldin Economics (July 15, 2013).
The bottom line is that there is a very serious shortage of physical gold, and as this becomes increasingly apparent to the rest of the world, this is likely to cause a tremendous amount of instability in the financial markets in the months ahead.
Right now we are also witnessing tremendous demand for physical silver as well.
And remember, unlike gold, silver is used in thousands of different consumer products. So silver is continually being used up and taken out of the overall global supply.
If silver continues to be used at the current rate, eventually the global supply would be whittled down to almost nothing. And right now, it appears that the industrial demand for silver is rising substantially.
For instance, a recent article by David Franklin and David Baker described the massive amount of silver that is going to be required by Japan and China as they move very heavily into solar power over the next few years…
With 5.3 gigawatts of new capacity in Japan in 2013 and up to 30 gigawatts added in China over the next three years, the solar industry could potentially have a big impact in the silver market. Silver is a key component in solar panels due to its unique electrical conductive properties, with approximately 80kg of silver required to generate 1MW of electricity. According to the Silver Institute, one megawatt of solar power requires as much as 2.8 million ounces of silver. China and Japan's solar projects combined will add up to 27 gigawatts over the next three years. This capacity will require approximately 91 million ounces of silver, which means that China and Japan's new demand could consume up to 11% of global mine supply – and that's if the world produces as much silver as it did in 2012.
Silver used in solar panels cannot be recycled and therefore disappears from the world's silver stockpile. If China and Japan can follow-through with their respective solar programs, the silver market could benefit significantly.
So what does all of this mean for you?
What it means is that while we may see wild fluctuations in the prices of gold and silver over the short-term, the long-term prognosis for both metals is absolutely fantastic.
