As I write this, a storm is blowing outside, quite literally. The ceiling lights have flickered off twice and I’m running on tea and that focused concentration that comes from a disturbed night of sleep from heavy wind and rain.
For years we, at Bleyer, have been saying to our readers and clients that the price of Gold and Silver is fixed to the price of paper certificates in those metals. The physical price of the bar and coin is not, currently, fixed to the actual demand for the Physical metal. A strange anomaly is something so central to the history of economics as Physical Gold and Silver bars and coins.
Yes, the price of Gold and Silver currently fixed to the paper price fix has been going up, quite spectacularly. If you watch it closely, it’s also had its moments of being punished by the market being flooded by paper sales. But it currently keeps trying to push further upwards regardless. But the real test of Gold and Silver’s worth is the demand for physical ounces.
Any logical investor would ask, “Has the demand for Physical Gold and Silver also been going up and by the same percentages as the paper ETF’s?” If so, we can assume the current “price” is reflective of demand. But, if physical demand is rising slower than the paper price, then Gold and Silver are over-priced in an open market. But if the demand for Physical Gold and Silver is rising at an even steeper rate than the paper price rises, then Physical Gold and Silver are under-priced and have much more inherent value than their paper price reflects. So, where are we now?
In the office, we’ve often mused on what would happen if one day the prices for these two very different products – real physical Gold and Silver vs. their paper counterparts – de-coupled. What would happen if the ratio of paper certificates to actual available physical ounces was so disproportionate that the two separated in price? Imagine if there was one price for certificates, which would then just be pieces of paper with a promise to deliver the equivalent physical (that couldn’t possibly be backed up) and another entirely different price for the much rarer actual Physical Gold and Silver bar or coin? The former would go to zero and the latter would sky-rocket.
And for the record, we, as an international economic model, are already well, well over the line of not being able to deliver the ounces promised in paper Gold and Silver certificates.
So, I went hunting for the information on ratio of physical to paper in Gold this week, to bring to you our readers. And what I found even staggered me! By way of introduction, The Comex referred to in the following paragraph is, “is the primary market for trading metals such as gold, silver, copper and aluminium. Formerly known as the Commodity Exchange Inc., the COMEX merged with the New York Mercantile exchange in 1994 and became the division responsible for metals trading. Precious metals refer to the classification of metals that are considered to be rare and/or have a high economic value. The higher relative values of these metals are driven by various factors including their rarity, uses in industrial processes and use as an investment commodity. Precious metals include, but are not limited to: gold, silver, platinum, iridium, rhodium and palladium. Investing in precious metals can be done either by purchasing the physical asset, or by purchasing futures contracts for the particular metal.” (Investopedia)
There had been an eerie silence at the Comex in recent weeks, where after registered gold tumbled to a record 120K ounces in early December nothing much had changed, and in fact the total amount of physical deliverable aka “registered” gold, had stayed practically unchanged at 275K ounces all throughout January. Until today, when in the latest update from the Comex vault, we learn that a whopping 201,345 ounces of Registered gold had been de-warranted at the owner’s request, and shifted into the Eligible category, reducing the total mount of Comex Registered gold by 73%, from 275K to just 74K overnight. Meanwhile, the aggregate gold open interest remained largely unchanged, at just about 40 million ounces.
“This means that the ratio which we have been carefully tracking since August 2015 when it first blew out, namely the “coverage ratio” that shows the total number of gold claims relative to the physical gold that “backs” such potential delivery requests, – or simply said physical-to-paper gold dilution – just exploded. As the chart below above – which is disturbing without any further context – the 40 million ounces of gold open interest and the record low 74 thousand ounces of registered gold imply that as of Monday’s close there was a whopping 542 ounces in potential paper claims to every ounces of physical gold. Call it a 0.2% dilution factor.” (Zerohedge, Something Snapped at the Comex, 2016).
542 paper ounces to every 1 physical ounce! Wouldn’t it be something if the price of Physical Gold therefore reflected its real value, dictated by supply and demand!
I did some calculations this morning. In 2014, that ratio of paper to physical was reported as already standing at 117:1! So the ratio of paper to physical has increased by a multiple of 4.6 in the last two years! If this market was based on purely supply and demand, that would mean an increase in the price by a multiple of 4.6. The lowest price in 2014 was £725 and the highest was £819. So, taking the mean, that would give a price of £772 per ounce. If that had risen by a multiple of 4.6, then the gold price would stand at £3551 today. This is why this current scenario and price are unsustainable. Either the paper market will collapse and de-couple from the price of physical or the price of physical will sky-rocket up to its free market value. Even today – before currencies collapse out in the open – based on these figures the price should be £3551 an ounce, not £879 (at time of writing). Something has got to give but until it does, the real figures, I believe, show that Gold is under-priced and in a buying opportunity.
And if that wasn’t amazing enough, just to wake us all completely up, these figures were from January! Imagine the disparity after another two months of rising prices! The price change in Gold for the last month alone has been +9.24% or £74.74 an ounce and for the last three months a whopping +23.18% or £166.62 an ounce!!
If these figures are true, why aren’t we hearing more about this? Because banks and markets need to trade to survive in this fiat house of cards. But, just like so many things in life, increasing underlying pressure can alone be bottled up for so long. Just like tectonic plates, at some point, it cracks open. Last Friday, that is exactly what happened:
“For years central banks have used the paper gold markets to control and manipulate precious metal prices by allowing actions such as unlimited naked shorting to force down prices in a move meant to protect the dollar. And among those paper markets are the exchange traded funds (ETF) which allow traders and investors to ‘buy’ gold without having to have it delivered to them in physical form. But on March 4, one of these ETF’s suddenly cracked and is suspending new traders from getting into the fund because after five years of control over gold prices, the physical markets are conclusively disconnecting from the equity markets which regulate paper gold securities through a daily price fix. In Black Rock’s statement regarding their iShares gold trust (IAU), the broker cites that the demand for gold shares has risen so quickly this year that they no longer can issue new shares in relation to the amount of physical gold they claim to have available in their vaults underlying the paper securities.”
“Just yesterday, gold entered a new bull market as the price has now risen over 20% since its lows back in early December of 2015. And with several new programs coming online such as India preparing to remove import duties they currently have on the precious metal, and the Shanghai Gold Exchange preparing to announce a new Yuan denominated gold price as early as April, fear within the economy is causing investors en masse to rush into gold as a safe haven to protect against declining currencies, and negative interest rates.”
“Just as many analysts are seeing 2016 as a repeat of the environment that led to the 2008 Credit Crisis and stock market crash, so too is the environment for gold, finding its footing, after years of being in a bear market. And with short interest right now incredibly high in the paper gold markets, chances of seeing even more ETFs like Black Rock halt or suspend trading in one capacity or another is very likely as the price continues to soar upward towards its previous all-time high.” (The Examiner, March 2016)
Now, in light of this, will the factors causing the rush into Gold get better or worse? It really doesn’t take much research to see we’re heading for an economic storm, maybe unlike one we’ve experienced before. In Britain, we are facing a bumpy ride, as the Euro Zone sinks around us:
“The ECB is facing renewed euro zone deflation, low inflation expectations and stuttering economic activity,” says Howard Archer, chief European economist at IHS Global Insight. Like some other central banks, the ECB is discovering that its attempts to slash interest rates and pour money into the financial system by buying bonds is having a limited impact. After a brief upturn late last year, the euro zone economy has slid right back to where it was with new data showing that deflation returned with a vengeance in February. The problem is that with interest rates already down at 0.50% the central bank has no new tricks up its sleeve.” (News Markets, 2nd March 2016)
We also have the E.U. referendum approaching. On the one hand, “John Longworth, the director-general of the British Chambers of Commerce (BCC), said the UK’s prospects could be “brighter” outside the EU. The BCC has vowed to remain neutral on the issue due to the divide in its membership, although Mr Longworth noted he was speaking in a personal capacity.” (Politics Home, 6th March 2016) He was then, as you probably know, suspended for voicing his opinion!
On the other hand, we’ve got Mark Carney, “the Governor of the Bank of England, has described the prospect of a British exit from the European Union as the “biggest domestic financial stability risk” facing the UK” but he wasn’t suspended for his opinion! Even though the Bank of England also should not “take a position on whether Britain should stay in the 28-member bloc.
I believe one can usually spot the dominant narrative by the level of punishment given for not following it! “Prominent EU-Out campaigner Mr Johnson argued it was “absolutely scandalous” Mr Longworth had been made to step aside. “This is a man who reached the conclusion – after long reflection and a lifetime’s experience of business – that it would be better to Vote Leave,” the London Mayor said in a statement. “He speaks for the many small and medium sized businesses – the lifeblood of the economy – who cannot understand why they should comply with more and more regulation, over which this country has no democratic control. Mr Johnson argued it was wrong that “when someone has the guts to dissent from the establishment line, he or she is immediately crushed by the agents of ‘project fear'”. (Politics Home)
All this ‘fear’ is, sadly but logically, positive for physical Gold and Silver demand.
Personally, I think the factors that set up the coming global economic storm have been in place since the crash of 2008 and to blame something as recently announced as the E.U. referendum is illogical and therefore highly questionable. Quantitative easing, zero interest rates, increased global debt to international GDP’s and our current deflationary period began in response to 2008 and have only been building in intensity over the years since. These are, in fact, the ‘biggest financial risks facing the U.K.”
And the deputy managing director of the International Monetary Fund agrees. Yesterday it was reported that, “the world is heading towards “economic derailment” unless policymakers make tough choices to get the recovery back on track, a top International Monetary Fund official has warned. David Lipton, deputy managing director of the Fund, said urgent action was needed to boost growth and dispel the “dangerous” view that policymakers had run out of ammunition. He warned that the downside risks to the recovery were “clearly much more pronounced” than at the start of the year, suggesting the IMF was poised to slash its global growth forecasts for the fourth time in a year. In a separate speech, Martin Weale, one of the Bank of England’s nine rate-setters, said policymakers had the tools to fight another UK downturn if the outlook worsened.
The Bank could cut rates closer to zero, restart its quantitative easing programme and even hoover up corporate debt. However, he warned that introducing negative rates in the UK could be counterproductive and even “wrong” if it hurt the real economy. “Negative interest rates may provide some support, but the extent of this depends on how banks behave, and whether they are able to pass on the full amount of the rate reduction to borrowers,” he said. (The Telegraph Business, 8th March 2016)
Again, all these counter-productive monetary policy moves are positive signs for Gold and Silver, as history, and actual demand, has borne out.
Bleyer Bullion offer investors the opportunity to buy a variety of gold and silver bullion coins from around the world. While these collectors coins are highly transportable and easy to store in terms of size, many of our clients also like to use our preferred custodians in terms of value and rarity, for safe, secure, fully insured bullion storage facilities of their gold bars and coins. Whilst coins tend to cost very slightly more than bars they may carry the added advantage of being not only VAT free but also CGT (Capital Gains Tax) free. All coins sold through Bleyer meet the criteria for investment gold and are at least 22 ct or above. All investment gold is exempt from VAT and many gold coins are exempt from Capital Gains Tax. If you are considering buying gold for your SIPP bars are a cheaper alternative. Bleyer are approved for the purchase and storage of SIPP Pension or SSAS Pension Gold.
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