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The article that
appeared in the Financial Times on Thursday and was dispatched by GATA was
very significant:
http://www.ft.com/cms/s/0/077b765c-c77c-11dd-b611-000077b07658.html?ncli...
What was especially
significant was the article's necessity to supply disinformation:
"Traders have
been hearing talk that the gold market could face a potential squeeze at the
end of this year if market participants with futures position on New York's Comex
exchange decide not to roll over their positions, because of concerns about
counterparty risk and opt for physical delivery instead. But dealers
dismissed the threat of a squeeze, pointing out that Comex gold stocks stand
at 8.5 million ounces, well above the five-year average of almost 6 million
ounces. ..."
The 8.5 million
ounces cited here are the total Comex inventory. This
includes gold that belongs to customers who are storing it on the exchange. The
amount that is registered to dealers, and therefore available for delivery,
is only 2.846 million ounces. The delivery notices that have been issued so
far in December total 1.26 million ounces, which is 44 percent of the
available deliverable gold. This assumes that the gold registered to dealers
is totally unencumbered, which is not necessarily a good assumption in the
fuzzy accounting world of Wall Street.
What is very telling
is that the reason for investors taking delivery is given as
"counterparty risk." They could have said that it was due to
investors "wanting the safe haven of gold in times of financial
crisis," etc. Stating unequivocally "counterparty risk" as the
reason for high delivery demands is the first reference to the possibility of
Comex going into default that has appeared in the mainstream press. It is
also of note that it appeared in the Financial Times, which is traditionally
anti-gold.
The pieces of the
puzzle are falling into place:
-- The central banks
are selling only a fraction of their Washington Agreement allowance.
-- Coin-melt gold
bars are showing up on the wholesale market, indicative of the bottom of the
barrel.
-- The U.S. Mint is
rationing coins.
-- The Perth Mint
has suspended taking orders for any bullion products.
-- Retail dealers
are sold out and only small quantities of precious metals are available.
-- The traditional
major shorts on the Tokyo
commodities exchange have covered their positions.
-- Prices in the
retail market are very much higher than Comex spot.
-- Significant
reduction in the gold contango has been observed, and even some
backwardation.
-- A disconnect has
formed between Comex paper gold trading and physical gold markets.
Ever since July,
when one or possibly two U.S. banks sold short 10 percent of the annual
global gold supply and 20 percent of annual global silver supply (as
confirmed by reporting issued by the U.S. Commodity Futures Trading
Commission), the Comex price has been disconnected from the physical market
and has become the last bastion of the multi-year gold price suppression scheme.
Without a doubt the
hammering down of the paper gold price made many leveraged speculators head
for the exits, as demonstrated by the 50 percent reduction in open interest. But
the investors who remain are not leveraged, and unfortunately for the Gold
Cartel they are taking delivery from the Comex. Talk of a squeeze due to
"counterparty risk" will no doubt encourage more investors to take
delivery.
We will probably see
a reduction in contango in the further-out months reduce and gold purchased
in the cash market as investors switch from future IOUs to real metal. This
may even provoke a much more pronounced backwardation than we have already
seen in recent days.
Make no mistake
about this. We are seeing the early signs of a gold rush
like the world has never seen before. Investors do not take physical
delivery of gold to sell it back for a 10 percent profit. The
inflation-adjusted high of gold in 1980 is $2,500 today. But today we are in
the midst of an unprecedented global financial crisis. Simultaneously every
country is hell-bent on currency destruction as an antidote to too much debt
creation.
What is gold worth
in such a scenario?
Who knows? But it is
multiples of where it is now.
The precious metals
that are being taken off the market will not see the light of day again for a
long time. The central banks have almost stopped selling gold and mine supply
is dropping year after year.
My unique analysis
methods at www.mareketforceanalysis.com indicate that gold and silver are at very good buy points. Gold and
silver are selling for almost their cost of production, so the downside is
severely limited because no commodity can trade below its cost of production
for very long because producers go out of business, thereby reducing supply,
which increases the price.
Former Federal
Reserve Governor Lyle Gramley appeared on Canadian
television this week and hinted that a big upward revaluation of gold may
figure heavily in the Fed's attempt to rescue the U.S. economy. This comment
suggests that the issue is in the hands of the Fed.
But if the shorts on
Comex get squeezed and the Comex defaults on physical delivery, the market,
not the Fed, will decide the true value of gold.
How many times do
you get warning of what will likely be the trade of the century? There is no
such thing as a risk-free trade, but I think this is as good as it gets.
Investors should
take physical delivery and not be leveraged. This way you will make sure you
are around for payday and you will put more pressure on the shorts who have
fraudulently sold gold and silver that they are unable to deliver.
Whether there is a
massive squeeze on the Comex in December or February is irrelevant. The gold
rush is on. When gold and silver become unavailable, prices will have to go
up by multiples. The beaten-up mining sector will reach new highs. When the
precious metals are not available in bullion form, the next best thing for
investors will be companies that dig them out the ground.
Adrian Douglas
Marketforceanalys.com
Adrian Douglas is proprietor of the Market Force Analysis newsletter (www.marketforceanalysis.com) and a member of GATA's Board of Directors.
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