Sunday, September 27, 2015

Gold "Tightness": When There's No More To Sell, There's No More To Buy (At Any Price)

"Submitted by Chris Martenson via,
One of our long-running themes here is that the truly historic and massive flows of gold from West to East is (someday) going to stop, for the simple reason that there will be no more physical bullion left to move. 
It’s just a basic supply vs. demand issue.  At current rates of flow, sooner or later the West will entirely run out of physical gold to sell to China and India.  Although long before that hard limit, we suspect that the remaining holders of gold in the West will cease their willingness to part with their gold
So the date at which “the West runs out of gold to sell” is somewhere between now and whenever the last willing Western seller parts with their last ounce.  As each day passes, we get closer and closer to that fateful moment. 
This report centers on preponderance of fascinating data revealing the extent of the West's massive dis-hoarding of physical gold, for the first time, begins to allow us to start estimating the range of end-dates for the flow to the East.
Here’s the punchline: there’s an enormous and growing disconnect between the cash and physical markets for gold. This is exactly what we would expect to precede a major market-shaking event based on a physical gold shortage.

Stopping the Flows

There are only two outcomes that will stop the process of Western gold flowing East, one illegitimate and the other legitimate. 
  1. It becomes illegal to sell gold.  This is the favored approach of central planners who prefer to force change by dictate rather than via free markets and free will.   Unfortunately, this strain of political intervention is dominant in the West, particularly in the US and EU.
  2. The price of gold dramatically rises. A large increase in the price of gold will (paradoxically) cause greater demand for gold in the West and (sensibly) less demand in the East. This is what should legitimately happen given current supply and demand dynamics. But it may not. 
There’s always a 3rd option, we suppose: economically carpet-bombing China and India's financial systems to scare/force some gold back out. Consider such an approach along the ‘economic hitman’ lines of thinking. 
This would be done, for example, by having outside interests sell the Rupee furiously, driving down its value and forcing the Indian monetary authorities to defend it by using up foreign reserves to buy the Rupee. Then wait for India to run out of foreign reserves and then casually ‘suggest’ that its government use gold sales to continue defending its currency.  India's leaders would have to find ways to somehow ‘coax’ gold from its citizens.  I think we can all imagine the sorts of draconian rules and penalties that desperate governments would deploy in such a situation.
As a side note, I believe this is the same process that was used to ‘coax’ a lot of gold out of the GLD trust since 2012. After enough bear raids on the price of gold, which began somewhat suspiciously almost exactly on the date that QE3 was announced, Western gold ‘investors’ lost interest in the yellow metal, sold their GLD shares in droves, and hundreds of tons of gold were liberated from that stockpile.
What is truly odd from a chart perspective: this hammering down of gold started just after it had broken to the upside out of a textbook perfect triangle, when it looked seemingly ready to head off to higher values:
But in the days immediately following the QE3 announcement, gold shed $100, then barely recovered, and just wandered lower until it was violently slammed from $1550 to $1350 over one night (of course) in April 2013.
Now this was highly fortuitous for the ever-lucky Federal Reseve. After launching the largest money printing campaign in US history, the Fed did not need gold heading any higher, possibly providing a signal that would cast doubt on the wisdom or possible effectiveness of its easy-money policies. Policies, mind you, that the years since have proven to do little more than enrich the banker class and the 0.1%, as well as lard the system with extraordinary levels of new indebtedness and liquidity.

The Fed Indeed Cares About Gold

Gold, when unfettered, has a habit of sending signals that the Fed really doesn’t like. Therefore the Fed is at the top of everyone’s suspect list when it comes to wondering who might be behind the suspicious gold slams. Whether the Fed does it directly is rather doubtful; but they have a lot of useful proxies out there in their cartel network.
To reveal the extent to which gold sits front and center in the Fed’s mind, and how they think of it, here’s an excerpt from a 1993 FOMC meeting’s full transcript. Note that the full meeting notes from Fed meetings are only released years after the fact. The most recent ones available are only from 2009. Listen to what this FOMC voting member had to say about gold:
At the last meeting I was very concerned about what commodity prices were doing. And as you know, they got lucky again and told us that the rate of inflation was higher than we thought it was.

Now, I know there's nothing to it but they did get lucky. I've had plenty of econometric studies tell me how lucky commodity prices can get. I told you at the time that the reason I had not been upset before the March FOMC meeting was that the price of gold was well behaved.

But I said that the price of gold was moving. The price of gold at that time had moved up from 328 to 344, and I don't know what I was so excited about! I guess it was that I thought the price of gold was going on up. Now, if the price of gold goes up, long bond rates will not be involved.

People can talk about gold's price being due to what the Chinese are buying; that's the silliest nonsense that ever wasThe price of gold is largely determined by what people who do not have trust in fiat money system want to use for an escape out of any currency, and they want to gain security through owning gold.

A monetary policy step at this time is a win/win. I don't know what is going to happen for sure. I hope Mike is correct that the rate of inflation will move back down to 2.6 percent for the remaining 8 months of this calendar year. If we make a move and Mike is correct, we could take credit for having accomplished this and the price of gold will soon be down to the 328 level and we can lower the fed funds rate at that point in time and declare victory.
There it is, in black and white from an FOMC member’s own mouth spelling out the primary reason why I hold gold: I lack faith in our fiat money system. He nailed it.  Or rather, I have very great faith that the people managing the money system will print too much and ultimately destroy it. Same thing, said differently..."


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