Gold and Silver : Post-Crash Analysis

There is strictly nothing happening now on the gold and silver markets that would be related to fundamentals. This crash, just like the other ones, is orchestrated, and it doesn’t reflect the extremely tense situation on the physical gold and silver markets.

Here is how some of the significant elements are to be taken into account. I have put them in three different categories :

1) The Global Context
2) The Situation on the « Paper » Gold Market
3) The Situation on the Real Physical Gold Market

1) The Global Context : Nothing has Changed

- Protecting the Dollar :

Price manipulation has but one goal : protecting the value of the dollar in order to keep the Fed in control of interest rates and, thus, in control of US Treasury bonds and derivatives, largely held by the big banks.

If the Fed loses control of the dollar, which is bound to happen inevitably, since it’s printing billions of dollars every month, interest rates are going to go up radically, the value of US bonds will crash, the credit derivatives bubble will explode, taking with it the whole banking system.

Manipulating the price of gold serves the purpose, for the masses, of destroying the signal that would reflect the upcoming crash of the dollar and, by way of contagion, of the whole financial system.

Let me refer you to an excellent article by Paul Craig Roberts which explains in details how this recent manipulation took place and to whom it profits.

- The Fed continues to print $85 Billion each month. Japan announced the most ambitious quantitative easing plan of its history with an injection of $1.4 Trillion within two years. All this with no signs of any limitations on QE-type inflationary monetary policies.

- Holland’s Prime Minister has confirmed, as has a report from the FDIC, that deposits confiscations in Europe will be applied in future bailout plans, like in Cyprus. Trust in the European banking system is now at its lowest.

- Since 2007, the S&P has progressed by a mere 1% and, even after the last days’ correction, gold has performed over 100%.

- The gold spot price, this year, tumbled less than Apple shares, which lost 39% since its peak of last year.

2) The Situation on the « Paper » Gold Market

- Between Friday, April 12 and Monday, April 15, 1 million short contracts have been sold on the COMEX, i.e. 12% more than the annual world gold production.

- 150 tons of paper-gold were sold within an hour last Friday.

This sale was realised on the COMEX by a single entity, and it triggered a cascade of forced selling by investors totalling 500 tons of gold. One could logically ask the following question : Who has the financial power to realise such an operation? No trader ever sells such a position in one block at once.

Paul Craig Roberts: « Who has the capacity to sell the equivalent of 500 tons of gold on the markets for an amount of $24.8 Billion (or 16,000,000 ounces of gold, about 15% of world global production)? Who would own so much gold, enough to cover eventual delivery requests on those naked shorts? 

Also, nobody sells this much gold all at once; such a sale is done progressively so as not to crash the price and, thus, limit the losses.

As a matter of fact, this massive sale entailed a $1.168 Trillion loss. Who can afford to lose such an amount, but one who can print it? »

His answer : Only the Fed can finance such an operation and tolerate such a loss, since it can print money.

Parenthesis : The CFTC, supposedly in charge of regulating derivatives, notably those on gold and silver, authorises enormous concentrated short positions (thus taken by one or more entities) that perturb the normally free price determination mechanism. There could not be any manipulation of gold or silver if the CFTC were doing its job of regulating the derivatives.

 - The COMEX and the LBMA could be close to defaulting.

The COMEX functions on a fractional basis. There is not enough physical gold and silver in the COMEX inventories to guarantee the convertibility of all contracts.

Let’s recall that Kyle Bass, one of the most important hedge fund managers in the USA, who had correctly anticipated the bursting of the subprime bubble, confirms, in this video, that the COMEX does operate on a fractional basis. He decided, a few years ago, to ask for delivery of his gold held via his fund, because he didn’t have faith in the COMEX capacity to make good on future delivery requests. It would only take about 5% of contract holders asking for delivery to cause the COMEX to default.

- Available physical gold on the COMEX and the LBMA is dwindling.

And this is happening at the fastest pace since the start of the bull market in 2001. Delivery requests on the COMEX for the last 90 days represent 2 million ounces, or $3 Billion, as shown by this graphics.

Trust in the « paper » gold markets is waning. Investors do not want to be exposed to counterparty risk anymore. Either the COMEX or the LBMA, or both, will default in the coming months. The situation is untenable at the rythm at which investors are asking to convert their contracts to physical gold or silver.

Which has Andrew Maguire, a specialised gold trader in London, saying that this last crash’s objective is also to bring the prices down before an eventual default announcement from the COMEX or the LBMA.

This default will trigger a rapid rise in prices and what Egon von Greyerz anticipates as the most important short squeeze in history. Read the article by Egon von Greyerz.

- The « paper » gold price in Yen is at its highest in 33 years.

No wonder, with Japan’s most ambitious quantitative easing plan of its history. In less than two years, Japan will inject the equivalent in Yen of $1.4 Trillion, an unprecedented amount in the history of Japan.

Facing this inflationary threat, Japanese institutional investment funds, and Japanese people as well, are starting to migrate toward physical gold at the time that the speculators’ short positions (see COT report) on gold and silver are at a record high.

This global migration toward physical gold and silver is threatening a little more each day to trigger the explosion of the COMEX and LBMA markets. A single delivery default on these markets would make the price of gold rocket. The situation for the long term is untenable on these markets. The physical gold to cover delivery requests from contract holders is simply not there, it does not exist.

3) The Situation on the Real Physical Gold and Silver Markets

- China took advantage of last Friday’s crash to acquire 50 tons of physical gold.

Andrew Maguire, a trader on the physical gold market in London, has confirmed, in a recent interview, that China had acquired 50 tons of gold last Friday, right in the middle of the « paper » gold crash.

Visibly, China, and a host of other countries, are taking advantage of each price correction to acquire physical gold.

- The Two Most Important Bullion Dealers in the USA (Amark and CNT) Are Out of Silver.

Following the crash of these last few days, a massive demand has taken place in the USA and around the world for physical silver. Just the fact that this has virtually no effect on the « paper » silver spot price goes to prove that the « paper » silver market, just like gold’s, isn’t real anymore.

- Important Premium Hikes on Silver Coins :

Silver dealers pay up to $3/oz commission to acquire (when possible) silver coins, like the Silver Eagles. This commission comes before the one charged to the customer. So, at the end, the customer might pay up to 10-12% over the spot price for the coins. Which means that either producers or silver coins holders are not ready to sell on the basis of the « paper » spot price, and that the two markets are disconnected.

- A landslide in one of the mines exploited by Rio Tinto, in Utah (the second-most important mine in the USA), causes the equivalent of 16% of the US annual silver production to disappear.

This event occurred last Wednesday, before the crash. The mine will probably be closed for a few years.

Let’s ask this question : How can it be that such a reduction in world silver production hasn’t had any effect on the prices?

I’m maintaining my long-term analysis and continuing to recommend holding physical gold and silver for protection against coming events : bank failures, inflation and deposits confiscation. There is no chance at all for our actual monetary system of non-convertible currencies to last for a very long time.

These corrections are hard to take, but multiplying one’s capital in a context of disinformation, currency war and price manipulation entails some volatility. Investors must get a global understanding of the current events and trust their own interpretation of the situation.