Sunday, January 23, 2011

Gold and silver default scenarios

Buyers, who have legally contracted to take physical delivery of metals, are said to be accepting large, paper bribes to accept a cash settlement instead.
The reasons are obvious why there has been a great deal of discussion about actual, formal “defaults” in the precious metals markets. Among those “obvious reasons” is that informal defaults are apparently already taking place in both gold and silver markets.
Beginning in the London gold market over a year ago, and now rumored to be occurring in New York’s “Comex” silver futures market, buyers who have legally contracted to take “physical delivery” of the metals they have purchased are said to be accepting large, paper bribes to accept a “cash settlement” instead.
There are many reasons for investors to take such “rumors” seriously. Empirically, we see the premiums being charged for physical bullion (even from large, established dealers) rising to levels never before seen (around the world). This strongly suggests a very tight market for bullion. This is confirmed through the anecdotal reports of both industrial users and large institutional investors (such as Sprott Asset Management) that they are having a great deal of difficulty locating any large quantities of bullion available for sale.
In theoretical terms, we are merely seeing the culmination of arrogant bankers attempting to defy the elementary laws of supply and demand for over a quarter of a century. Even those with no training in economics know the basic rule (since it is merely an expression of common sense): when prices rise, demand falls; when prices fall, demand rises.
There are many derivative principles which flow from this one basic law. Among the most salient (and the one apparently beyond the comprehension of bankers) is that if you under-price any good it will be over-consumed. I have demonstrated the unequivocal truth of this principle previously, and so will not do so again. Suffice it to say that in deliberately under-pricing gold and silver for well over a quarter of a century (through their relentless manipulation of these markets), the bankers have caused more than 25 years of excessive demand – where previous surpluses in these markets have been transformed into huge supply-deficits.
In the gold market, where virtually all of the bullion ever produced has been conserved, this distortion of markets has merely resulted in a massive transfer of bullion: out of the vaults of the West and into the vaults of the East. The situation in the silver market is entirely different.
Being both much cheaper than gold, and possessing even more superior chemical and metallurgical properties, silver was written off by those with no understanding of precious metals as merely an “industrial” commodity. As a matter of common sense, the rapid increase in industrial demand for silver must make it more “precious” rather than less so.
Illustrating this elementary logic, the combination of gross under-pricing and surging industrial demand has served to decimate global silver stockpiles and inventories. Noted silver researcher Ted Butler has estimated that global stockpiles of silver plummeted from over 6 billion ounces (fifty years ago) to approximately 1 billion ounces today. Silver is literally six times “more precious” today than it was a half-century earlier. In terms of “inventories” (the amount of silver actually available for sale today), the destruction caused by the bankers is even more apparent.
Between 1990 and 2005, global silver inventories plummeted by roughly 90%: from over 2 billion ounces to little more than 200 million ounces. Since 2005, there has been a massive inventory-sham perpetrated by the bankers and the quasi-official “keeper of records” for the gold and silver sector: GFMS and the CPM Group.
Through the farcical practice of adding the paper-bullion of silver “bullion-ETF’s” to inventories and pretending this represents “new silver”, inventories have magically “risen” by roughly 400% since then – despite the seemingly incongruous facts that silver demand has increased dramatically, while supply has remained flat.
In fact, any bullion actually held in a bullion-ETF cannot be an “inventory”, since it fails to satisfy the basic definition: it is not for sale, but rather is privately held by the unit-holders of these funds. How can the holders of such funds sleep at night, knowing that the legal “custodian” of their bullion is telling the world that their silver is “for sale?"
Secondly, these holdings of bullion-ETF’s are not “new silver” in any possible sense of those words. The bullion-ETF’s didn’t mine their own silver. They didn’t discover “secret stockpiles”, all they have done is to buy 100’s of millions of ounces of silver out of existing inventories. For the record-keepers of the silver sector to pretend that these funds are “new silver inventories” is nothing but a shell-game of the clumsiest nature.
It is because of the enormous differences between gold and silver inventories that a “default event” is likely to be much different between gold and silver. With gold bullion being principally a financial asset in global markets, it is much easier to forestall a true “failure to deliver” from occurring at the official bullion exchanges (i.e. London or New York) through the unofficial default-mechanism of “cash settlements”.
Indeed, the bankers consider this mechanism to be a “perfect solution” for the parameters of having very finite amounts of (extremely leveraged) bullion, while having access to infinite amounts of banker-paper from central bank printing presses.
In reality, as the “cash settlements” continue to get larger and more frequent, at some point one or more large holders in this banker Ponzi-scheme are going to lose their nerve, and insist on real bullion rather than paper bribes. Such an event does not need to result in an official default. It merely needs to “spook the herd”.
As word gets out of some prominent investor refusing any quantity of banker-paper in favor of physical bullion (i.e. real “money”), this will cause the holders of $100’s of billions of dollars of “paper bullion” products to ask themselves a very pointed question: “am I holding ‘bullion’ or am I holding ‘paper’?”
More importantly will be their response to such a question. The two obvious responses are either to demand delivery or to sell their paper bullion. At that point, it won’t matter which path is taken, since both roads will lead to the obliteration of the bankers’ 100:1-leveraged, paper gold Ponzi-scheme.
If large numbers of bullion-holders demand delivery, there will either be a formal default in London or New York, or a formal default of the bullion-ETF’s – since their “custodians” (the world’s largest bullion “shorts”) will simply walk-away from their commitment to unit-holders in order to cover their own, massive short positions.
If large numbers of paper bullion-holders choose to sell their paper-bullion, this will create a massive decoupling between real “physical” bullion, and the vast quantities of paper-bullion products, where vendors are unable to conclusively prove these funds/accounts are fully-backed.
While the default scenario in the gold market is necessarily complicated, the silver market offers a much clearer picture. The billions of ounces of silver which have been “consumed” industrially are now buried (in tiny quantities) in land-fills all over the Western world. Meanwhile, a large and obvious supply-deficit remains (for any observer not duped by the clumsy inventory-fraud).
This can only end one way. Irrespective of whether the bankers can continue to mollify silver investors with their cash-bribes – and delay a formal default through investor demand alone, obviously this same mechanism cannot possibly work with the vast number of industrial users for silver – who need silver, or many/most of their businesses will cease to operate.
You can’t use banker-paper to make solar cells, lap-top computers, hybrid cars, anti-bacterial textiles, high-precision bearings, or satisfy any of the other myriad industrial applications for silver. Note that the bankers caused all of this incremental industrial demand through their decades of under-pricing silver – and now they have no possible means of meeting that demand.
The only question which cannot be answered for investors (the question which they would like answered the most) is “when will default occur?”
My own answer to this question is simple: the one aspect of “control” which the bankers still exert over the gold and silver markets is the timing of their own funerals. Allow these manipulated, grossly over-leveraged markets to implode today, and prices will soar higher (to multiples of current prices). Attempt to prolong their inevitable demise for several more months (years?), and all that happens is the implosion of these markets is even more catastrophic, with an even greater exponential effect on prices.
Investors should not be troubled by this relatively minor level of uncertainty, as their strategy should be obvious: continue to accumulate precious metals until the bankers self-destruct. The longer we are forced to wait for our final pay-off/validation, the greater the reward for our patience.
Meanwhile, the big-buyers who now rule this market can be expected to march precious metals prices higher – subject to occasional banker-orchestrated pull-backs, since these big-buyers will joyfully accept any “sales” on bullion provided to them by the bankers. The “obituaries” can already be written with respect to the era of banker-manipulation of precious metals markets.
It is just a matter of waiting to fill-in the date.

1 comment:

ahnn said...

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