Prices Fall As Physical Disappears

By Michael Pennington © Copyright 2010 Pennco Coins

Since reaching new highs at the end of 2010 gold and silver have been sold off, and the selling has been particularly intense in the last few days. This in spite of the fact the news on the economy is almost exclusively bullish for the precious metals. In addition, the dollar has dropped significantly during the same period suggesting higher precious metal prices. However, due to the price action one might be falsely led to believe that investment demand for the precious metals is waning. On the contrary, data reveals strong indications of growing shortages and furthermore that the gold and silver markets are approaching “tipping points” that will lead to an acceleration of price appreciation.

A close study of the open interest versus price data since silver went above $22/oz. indicates that as the price increases the open interest contracts! This means that in general existing shorts are covering their positions as the price rises. This is indicative of a looming chronic shortage. The owners of a commodity should be happy to sell at higher prices but that is not the case in silver. This shows that those who have committed to sell and don’t have the silver are buying back their commitments and those that have silver no longer want to sell it. There is no other way to interpret this change in relationship between open interest and price that has been developing over the last ten years. We have reached the tipping point where physical shortages are going to become more and more apparent.

Furthermore, John Embry in a recent interview with KWN explained how difficult it was to source physical silver for the Sprott Physical Silver Fund. I have written recently how Comex silver inventories are shrinking and are not far from ten year lows. The Financial Times just reported on acute shortages of gold bars for investment in Asia.

A spike in gold buying by Asian investors has created a scarcity of investment-grade gold bars in the region, supporting prices.
Traders said that gold sales to China had jumped 30 to 50 per cent since Christmas, driving the cost of kilo bars in Hong Kong more than $3 per ounce above the market price of gold, the highest level since 2008 and an indication of the tightness in the physical market.

“Physical demand has rocketed in China at the start of the year,” said Walter de Wet, head of commodities research at Standard Bank.
In the US, the Mint is selling silver at an unprecedented pace, It wass only a matter of time before the silver shortage would be spotted across the Atlantic, where distributors ran out of both gold and silver on a daily basis during the first time Europe became insolvent some time in early May 2010. Sure enough, has announced that it has run out of silver in Germany “due to high demand.” In the meantime, the CFTC’s actions have succeeded in allowing the JPM’s suppression of precious metals markets to continue indefinitely, yet all its actions have really done is to provide a short-lived lower cost basis for the precious metals as there is no indication demand is subsiding. At some point the margin calls will come. Then not even Gary Gensler will be able to bail out JPM.

In other words, due to high demand, our own silver stocks are exhausted right now. As BullionVault is only dealing with physical bars which are already in our possession, we are currently unable to offer, silver on our own market. Most contracts are being rolled over or forced to settle in cash.

The result of forty years of gold price suppression is not only the disappearance from the markets of unquantifiable amounts of physical into the firmest of hands, but also an accumulation of claims for physical bullion through the growth of unallocated accounts at the bullion banks; and the secret we would all love to know is how large this commitment has become. In the absence of hard facts, we have to assume that all banks are leveraged at least 10 to 1 as fractional reserve held against their unallocated gold accounts. Overall, it is possible that that these banks are short 20,000 tons on their unallocated accounts.

How will the suppression end? It will end when… an overwhelming crowd of gold owners realize there is a shortage, and finally decide they want “The Metals In Hand”. That day too will once be upon us.

…………… The process has probably already started in some secretive dark murky back quarters of the world, where mega wealth thrives.


About Pennco Coins

Pennco Coins
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