(DELIVERANCE: 1. ‘The act of delivering or the condition of being delivered’. 2. ‘Rescue from bondage or danger’.)
Why are Gold and Silver falling when they should be rising?
The collapse of MFGlobal proved that US Regulators now consider the balance-sheet stability of SIFIs (Systemically Important Financial Institutions) to rank above the cash deposits or collateral belonging to Joe Public. We have now officially gone through the Looking Glass and down the Rabbit Hole, into a world of Soviet-style central economic planning. The CME, the CFTC and the SEC appear to think it reasonable that a bank, lending funds to a brokerage house like MFGlobal, should then be able to take (and keep) the underlying client money and collateral as part of a margin call against the brokerage house. The implications of this event have not sunk in everywhere, even if they have to owners of Precious Metals. As ever, Gold and Silver investors are the most sensitive to issues of solvency and counterparty risk, and as such they have fled the COMEX and the paper market (as per the reduction in Open Interest). This flight has led to substantial pressure to the downside for spot prices. It is clear that the hypothecation of customer ‘assets’ held within the banking system is yet another form of woodworm hidden within the global financial architecture.
Meanwhile, even if you can buy coins in the Bullion Dealer at 5% over spot, the much bigger wholesale market is showing signs of extreme stress and Deliverance. CEO of Anglogold, Mark Cutifani, summed it up as follows:
“Major [asset management fund] buyers are finding it is hard to get physical gold. People are coming directly to us [for large gold purchases,] people who want tonnes of physical gold, people with serious financial muscle, because they are finding it is very difficult to secure the volume of gold they want. That is something we have noticed over the last 18 months, and it has been increasing in the last six months. People are finding it’s hard to get physical gold.”
Thanks to MFGlobal the custodial chains that lie behind the veneer of physical ‘ownership’ have been laid bare for all to see and the sight is truly ugly. No-one buying Precious Metals in size will now risk using the CME/COMEX, unsurprising after the debacle of the last month. They have shown their hand and it was a breathtaking sight. The CME could not make even less than $1bn of customer funds whole, for fear of setting a precedent with respect to hypothecation. My vision of average daily activity at the CME in 2012 looks something like this:
Another important point with respect to the recent ‘price action’, is that when ‘selling’ something, the seller usually looks for ‘best execution’. That is to say he wants the highest price for whatever it is he is selling. If we are to imagine even for a moment that the price action in Gold and Silver is reflective of free markets, we can expect sellers to sell only when they get best price, during times of maximum market participation. The reverse of course is the case here; throughout 2011 we have repeatedly seen waterfall declines in both metals during the illiquid ‘access market’, designed to trigger further technical selling. Effectively, the big drops in price have all happened when any selling in size would guarantee the largest drop, as there were no buyers around to take the other side of the trade. This doesn’t sound like an attempt at best execution, rather an exercise in ensuring worst execution to drive the market lower.
In the background, meanwhile, there are just 600million ounces of deliverable Silver in global inventories. Every year total annual mine production is around the 700million ounce mark while every day around 260x total annual Silver production is traded in global markets. We also know from recent comments by Jeffrey Christian of the CPM Group that the leverage in the huge unallocated Gold market is around the 350:1 level. No-one could reasonably claim that investors buy Gold to get just a 0.3% physical backing to their contracts. Investors buy Gold as a hedge against non-linear events, and as insurance against the behaviour of Bankers and Governments. The buyers of delivered physical metal are being swamped by the Collectivists selling paper promises of Gold and Silver which no longer have any semblance of reality.
With the leveraged western futures market now vacated by speculators after the outrage of MFGlobal, with a 1:1 allocated spot market being developed in China, and with institutional investors waking up to the difference between real and ersatz Precious Metals, 2012 is set up to be the ultimate year of Deliverance. This idea of a seachange coming over the horizon is also supported by technical analysis of important and secular Bull markets, where the biggest move tends to happen after a period of capitulation by weak hands. See the comparison of the current Bull market in Gold and the decade-long NASDAQ (in blue):
Global ‘fiat’ currency markets are going through their death throes. These confidence-based currencies are being nursed and eased through their terminal phase by Central and Commercial Banks. On a cursory examination Governments and Bankers are doing a reasonable job of making the currencies appear viable in the short-term, despite the ever-expanding black-hole of indebtedness surrounding them. A closer inspection, however, reveals that the US is technically insolvent. The UK is technically insolvent. The Eurozone is technically insolvent. There is no viable way for Western nations, especially Spain, Italy or France (another SIF acronym) to borrow their way out of their deficits. The US recently even set up an esoteric and open-ended Dollar Swap line with the ECB to bail out the European Banks, keeping the overall ‘fiat’ system alive in the short-term and kicking the can just a little further down the road.
The US, the UK and European Governments are ALL intervening in Precious Metals markets in the vain attempt to prop up their currencies, as is shown by the flooding of leased (paper) Gold into the system in December. Indeed instead of charging a rate of interest to lend (paper) Gold, Central Banks were paying the commercial banks to lease and then dump metal this month. The London Gold Pool of the 1960s is back and in full and overt effect. The leased ‘Gold’ already has multiple owners, has been rehypothecated endlessly and serves to further depress the true coverage in the unallocated Gold market below the already absurdly anaemic 0.3% level.
From here, on a macro ‘Central Banking’ level, there are really only 2 realistic outcomes – one is a total systemic banking collapse (caused by the black-hole of debt consuming everything in its path), leading to deflation and martial law. The other, one would hope, is the more likely outcome – more monetisation (QE), dilution and leading from that, inflation. Historically, Central Bankers that have recourse to the printing press will always use it, and Ben Bernanke at the Fed is the most overt supporter of such activity there has ever been. He once even threatened to drop freshly printed bills from helicopters should the threat of systemic deflation rear its head in earnest. 2012 will undoubtedly see more rounds of Quantative Easing. The US, the UK and the Eurozone have signalled as much already, it is just a question of timing. When this happens no amount of selling paper contracts into thin volume in the access market will stop the ascent of Gold or Silver.
Genuinely, the only liquid and viable competition to ‘fiat’ stores of value are Precious Metals. Gold and Silver have always been the enemy of the Statists and have represented free markets and individual liberty for millennia. Never has the need to squash Gold and Silver been more critical to fractional-reserve banks or bankers. The clash between the individual and the State is building to a crescendo. The set up for 2012 looks profoundly bullish despite the brazen paper selling of promises to deliver Precious Metals by the collectivist paperbugs. This reversion to the mean (ie reversion to a physical market for the metals) has been a very long time coming. It does however appear in terms of today’s price on the screen, to have been an example of ‘be careful what you wish for’. Continued volatility can be expected from here, but I am with the Commercial Banks (for once!) in expecting new all-time highs for the metals as 2012 progresses.