As the Christmas season passes, and the end of 2013 is upon us; this is a natural time to reflect upon what has transpired over the last year in the precious metals sector. Obviously 2013 will not be viewed as a good year, in retrospect, by precious metals investors.
This was the year of Hostage Markets; the year that the One Bank demonstrated in its own, inimitable, heavy-handed manner that it had corrupted our markets to the point where it could freeze bullion prices at any number it chose – regardless of supply/demand fundamentals. However, while these fundamentals have become virtually invisible, by no means have they ceased to exist.
Rather, in exerting absolute short-term control over bullion markets the One Bank has inadvertently once again demonstrated its (long-term) impotence against those fundamentals. When it perpetrated the Cyprus Steal to create a “precedent” for its newest form of paper-theft (the “bail-in”); the One Bank caused a stampede out of its own paper-called-gold, and an unprecedented collapse in the entire paper-gold market.
Worse still (for the Bankers), this exodus out of paper-called-gold manifested itself primarily in the form of a stampede into real, physical bullion. In part; this was a reflection of paper-called-gold holders swapping paper for metal – with the inevitable effect of a massive draw-down in Comex inventories.
However, the stampede out of paper-called-gold also caused an inevitable plunge in the price of gold, all “gold”. Thus at the same time that Western paper-holders were causing an artificial drop in the price of gold by moving from paper to metal; Eastern gold-buyers also stampeded into the market – attracted by the give-away prices created by that exodus.
Indeed, as reported earlier this year; at one point gold imports into China and India alone had spiked to an annualized rate of about 4,000 tonnes/year. This occurs in a global market where annual mine-supply is well below 3,000 tonnes/year, and falling.
Facing a new “supply crisis” in bullion markets (and again one of its own creation); the One Bank responded with its most blatantly brutal tactics to date. By manipulating the exchange rate of India’s currency to a record-low (via its now-exposed FX-rigging); the One Bank blackmailed the government of India into suspending all gold imports into the world’s largest gold market.
The Laws of Supply and Demand responded, again. Part of the frustrated demand for gold within the Indian population re-ignited gold-smuggling into India. Indeed, the government of India had spent years liberalizing trading rules for importing gold into the country precisely because gold-smuggling had previously been so prevalent. Thus it required only days to re-open those dormant smuggling routes.
However (as also previously noted) part of the frustrated demand for gold in India has morphed into demand for Poor Man’s gold: silver. A year which started out appearing to be a record year for Indian gold-imports quickly pivoted into a year of record silver imports instead.
Because the price of silver itself has been manipulated by the One Bank to such an extreme low, even these “record imports” into India only equal a small portion of the total amount of wealth which Indians had been previously funneling into gold. Presumably, gold-smuggling has only restored a fraction of the level of supply which has been lost in the form of official imports. Thus a considerable amount of pent-up bullion demand remains unsatisfied.
We see evidence of this pent-up, unsatisfied demand in the form of a slow-but-steady decoupling in prices for gold in India. We have the phony, artificially-low “official” price for gold, the product of the One Bank’s price-fixing. But now we also have the steadily increasing real price for gold in India: the blackmarket price.
The results achieved by the One Bank in its savage attack on India’s gold market are a less-than-impressive victory:
a) The beginning of a Decoupling in prices (in the world’s largest gold market) between the fraudulent, official price for gold in the bankers’ dying paper-called-gold markets versus the price for real, physical bullion.
b) Pent-up demand for gold in the Indian market. When (one way or another) the Indian gold market is once again “liberalized”; that tidal wave of unsatisfied demand will be unleashed, just as has occurred in China.
c) Record silver imports.
Massive, heavy-handed attacks on legitimate bullion markets (or any market) result in massive consequences. This is merely the latest example of what we see again and again. It was the savage price-suppression of bullion markets during the 1980’s and 90’s which created the massive bullion-run for gold and silver which lasted for more than a decade.
The longer that the One Bank plays its new game of Hostage Markets, the greater will be the consequences – in the opposite direction. The Laws of Supply and Demand will not be denied. After the previous, twelve-year bull run; do we need to fear (once again) decades of frozen prices in this reborn paradigm of Hostage Markets? Of course not.
What were the consequences the last time the One Bank exerted absolute control over bullion prices in its 20-year reign of terror? It squandered the largest stockpiles of bullion ever accumulated by our species. The 12-year bull run in precious metals markets from 2000 through 2011 was the product of that resultant inventory crisis.
Did the One Bank (and our Puppet Governments) spend that time rebuilding their inventories? No. They continued squandering what little gold they had left (after all their silver was already gone), until the gold-dumping by Western central banks abruptly screeched to a halt in 2009 – at least all official dumping.
Our new “era”(?) of Hostage Markets begins with the inventory-crisis which existed in 2000 having gotten substantially worse, fourteen years worse. Fourteen more years of the above-ground stockpiles of bullion being devoured, in an unprecedented shift of wealth and control from West to East. “He who has the Gold makes the Rules.”
As the warning-bells of (official) bullion-default and/or unofficial Decoupling ring even louder at the end of 2013 than they did at the beginning of 2000, they ring loudest in silver. Regular readers will be familiar with the chart below, the last time we saw any legitimate numbers on global silver inventories.
Price-fixing by the One Bank in the silver market during the 1980’s and 90’s (and the 600-year low in the real-dollar price of silver which resulted) led to a 90% collapse in silver inventories from 1990 – 2005 alone. What happened after 2005, as this collapse seemingly began to reverse?
This was when the One Bank instructed its minions to begin falsifying the numbers on global silver inventories. This was accomplished in an absurdly clumsy manner: through adding silver sales receipts into total inventories. Specifically, every ounce of “silver” purchased in the bankers’ paper-called-silver market was added into total inventories. This has produced the totally farcical scenario in this quasi-official “record-keeping” where the more (paper) silver which is purchased, the larger the phony, official inventory numbers grow.
In short; we have absolutely no idea whether there are only two days of supply remaining for global demand for silver or two years. We only know that by 2005 the One Bank was already so alarmed by the complete collapse in global silver inventories that it began falsifying the reporting of this data – and this inventory-fraud persists to this day.
Newer readers also need to understand the fundamental differences between the gold and silver markets; what was described in a previous commentary as a matter of “stocks and flows”. While gold has been conserved over the past decades (and centuries), silver has been consumed.
Artificially priced far below its real value decade after decade; industrial demand for silver (the world’s most-versatile metal) has soared. Used primarily in small amounts; most of the silver mined over a span of more than 4,000 years is now strewn across (primarily) Western landfills. This silver cannot ever be economically recovered unless the price of silver should soar to some fantastic multiple of current prices – and thus has effectively been “consumed”.
While priced at a current ratio of 60:1 versus gold; the Earth’s crust contains only about seventeen times as much silver as gold. This is why (for more than 4,000 years) the legitimate price ratio between gold and silver hovered around 15:1.
Yet with global inventories/stockpiles of silver already at all-time lows (in per capita terms); we see the flows of (real) silver being sucked out of those dwindling inventories occurring at an even more unsustainable rate than in the gold market.
Investor demand (as reflected in the sales of U.S. gold and silver minted coins) almost precisely mirrors the 60:1 price ratio. Total “fabrication demand” for gold and silver (industrial demand/jewelry demand) is presently at ‘only’ about a 10:1 ratio (based on data from the WGC and Silver Institute); but with silver inventories/stockpiles already decimated, even that modest ratio is unsustainable.
The year 2014 should be “the year of silver”, in terms of fundamentals dictating a correction in prices which dwarfs the modest tripling which took place in 2009. However, if 2014 is not the year of silver; we should feel quite confident in predicting that 2015 will be the Year of Silver Default.
Jeff Nielson is co-founder and managing partner of Bullion Bulls Canada; a website which provides precious metals commentary, economic analysis, and mining information to readers/investors. Jeff originally came to the precious metals sector as an investor around the middle of last decade, but soon decided this was where he wanted to make the focus of his career. His website is www.bullionbullscanada.com.