Meanwhile, lower and lower prices continue to devastate the mining industry tasked with providing supply. Inventories are dwindling because crippled mining companies aren’t keeping up. COMEX gold inventories sit at record lows, with just a few tons of registered bars available for delivery. And this year, COMEX silver vaults witnessed the biggest net outflow of stocks since 2009. However, none of these fundamentals show up in the spot prices for gold and silver, which have fallen relentlessly and hover near 5-year lows. These low prices would seem to indicate a glut of supply and falling demand. So why do prices reflect the opposite of reality? The answer is that prices aren’t set in the markets for physical metals. Instead, prices are set in the futures markets. Contracts for gold and silver “paper ounces” are tied to physical stocks by the thinnest of threads. Lately these threads are getting thinner. In recent months, the number of paper ounces traded relative to the quantity of actual bars available for delivery exploded. Recent reports showed 325 ounces of gold futures trading for every ounce of physical gold registered in COMEX vaults.
Theoretically, as long as contract holders ignore the exploding leverage in the futures markets and almost no one cares about getting their hands on actual metal, spot prices can continue to fall. Ultimately, however, the futures markets run on confidence – traders’ certainty they can stand for delivery of the actual metal their contract is supposed to represent. Someday many of them may find themselves standing outside an empty COMEX vault holding a contract but wishing they held the bars instead. Physical supply and demand fundamentals won’t matter, until, suddenly, they do. Meanwhile, in the real world, demand for gold and silver coins, rounds, and bars just continues to grow. Lower prices don’t diminish the fundamental reasons for owning precious metals.
Additionally, bullion buyers are getting many more ounces for a like-dollar purchase. Consider that a purchase of $3,000 in early 2013 yielded only about 100 ounces of silver bullion. Today, that same $3,000 purchase brings a silver stacker nearly 200 ounces. That dynamic explains a big portion of the increased number of ounces being sold worldwide. Governments around the world continue to borrow in excess. Central bankers everywhere are working to devalue their currencies and stimulate price inflation. The potential for war and violence is escalating. Physical gold and silver remain a go-to asset for investors seeking a safe-haven, even if the same cannot be said for precious metals futures. Bullion is private, it is portable, it is liquid, and it can never go bankrupt or default. To secure those benefits, you must buy the real thing." (Clint Siegner, ETF News, 14th December 2015)
Next, we move onto the biggest emerging market in Physical Gold and Silver demand; India. Historically a country that has always valued owning Physical Gold and Silver, the government there did a predictable move recently. It tried to get Physical Gold and Silver out of the hands of the average member of public and back into the banks. But it didn't work and here's why:
"India’s newest gold monetization scheme has been a colossal failure. After one month, it has netted only one kilogram (2.2 pounds avoirdupois) out of an estimated 20,000 tonnes (44 million poundsavdp) of privately-held gold. Why is that? Well, let’s look at how the program works.
- Gold-holders turn their gold over to a bank. The banks melt the metal down and provide it to the central bank to loan to jewellers.
- In exchange, the central bank provides gold accounts to the banks on behalf of the gold depositors and pays interest on those deposits.
- The interest rate on those deposits is a little over 2%, while the inflation rate in India right now is over 5%.
- The deposits are time deposits, meaning that depositors receive their principal repaid at the end of the term; short-term depositors receive gold or rupees back, while medium- and long-term depositors receive only rupees.
So you give up all your gold, get at most a -3% rate of return on your investment, and might get both your interest payments and principal paid in rupees that the government has historically devalued at up to 15% per year. And the government wonders why gold-holders aren’t flocking to offload their gold? But not to worry, the government will make sure this scheme works: A finance minister official said...the government could intervene directly as it is looking for a big boost to the scheme to keep both imports and the current account deficit under control."
Commentator Paul Martin-Foss of the Mises Institute wonders if this isn't just "shades of 1933 all over again" when, as many of you know, physical Gold was confiscated from private owners. "One would imagine that outright gold confiscation...would result in massive protests and quite a bit of bloodshed. And while most rational people would assume that the government would be smart enough to avoid doing something so drastically stupid, this is the same government that developed the cockamamie gold monetization scheme in the first place. Never underestimate the idiocy of government bureaucrats, especially when those bureaucrats are trying to save face." There are other alternatives; it could "end any restrictions on the importation, transfer, and use of gold as money and allow markets to determine what money they wanted to use. Control is hard to give up, but the Indian economy would be far better off with gold as money instead of rupees." (Paul Martin-Foss, The Mises Institute, 13th December 2015)
And lastly, let's take a summarizing glance at Europe as we close out 2015.
"Europe has its own troubles that are only getting worse… and could potentially signal the end of the euro and the economic bloc itself. The attacks on Paris were such a major issue. It was like the 9/11 wake-up call. The 9/11 attack was larger. But Europe’s came after the recent terrorist attack on Charlie Hebdo, and while a massive refugee crisis was already calling everything into question. This recent escalation in terrorist events, including the Russian Metrojet being bombed, only creates an atmosphere within the euro zone of individual nations re-asserting their own sovereignty over one another." And that includes controlling their own borders and trade flows. That’s been the major flaw of the euro and the euro zone from the beginning. These very diverse nations with long histories of shifting alliances and wars don’t really trust each other – they never did. And they’d never fully submit to a fiscal and political union. Greater trade and migration flows were just fine – until something went wrong. Something like the Paris attacks… Russian aggression in the Ukraine… Or 800,000-plus refugees from Syria and the Middle East, with three million or more still expected to come. It’s a giant mess! And the refugee crisis specifically is a huge expense to the many European nations accepting them, all while they’re teetering on the verge of recession again. That can only get worse if the global economy continues to implode, and I see a 99% chance of that in the next few years. All of that’s piled on worsening demographic trends ahead, and the continued rise in geopolitical threats through 2019 on my 35-year cycle for that. With massive Quantitative Easing and the pledge from European Central Bank President Mario Draghi that he will do whatever it takes to reach target inflation, most think the euro zone has largely come out of its crisis. Little do they know the economic bloc is basically falling apart.
Shown here are the percentage of loans outstanding that are at least 90 days past due, and the percentage of these nonperforming loans to GDP. This ranges from the first tier of banking systems that are already clearly insolvent… to the few strong, yet small nations that are nearly sound. Among the worst are the usual suspects – Italy, Portugal, Spain, Ireland, and of course Cyprus. And I doubt it’s a coincidence that Greece isn’t even on this chart. To put it simply – Europe is caught in a downward spiral of its own making. The euro allowed the weaker countries to borrow at lower rates on their loans… and the stronger ones to export at lower rates on the currency. Now it’s coming to a head… and this great imbalance could unravel the whole system." (Harry Dent, The Market Oracle, 15th December 2015)
While we're probably focusing on making sure we've bought all the presents and the freezer is increasingly full, economically-speaking, this is an important week for the future of Britain, as reported in The Telegraph yesterday: "This will be a defining week for the Prime Minister and the future of our country. He will be heading to Brussels to try to get a better deal for Britain from the EU If EU politicians do not agree, then I believe he should announce this week that he will join the growing cross-party campaign to vote to leave the EU."
So, in conclusion, there are many great signs that the fiat currency system - far from recovering - is still in its death throws. We fully appreciate this is difficult to focus on during this holiday season. So, next week's blog will be as described, a look at what Gold and Silver products are bought and accumulated by whom, which coins and bars are proving most popular and what we offer, including our ongoing Special Offers. We look forward to providing you with information which can be browsed through and purchased from your arm chair. Before going onto the Amazon Boxing Day Sales, think Gold and Silver coins and bars as a great investment from any funds you may have spare waiting for the sales.
Until then, we wish you and your loved ones a very good week and holiday season.
The Bleyer Team