The notional amounts of the transactions on many days
exceeded annual mine production, absurd on the face of it. The motive was most
likely to break the gold price for profit. The result is that short positions
of these traders are higher than at the bottom in 2008 (chart below), after
which gold rallied 167% and mining shares 256% (basis XAU).
Traders exploited and exaggerated the technical
vulnerability of gold in our opinion simply because it was possible to do so.
Because the gold futures market offers deeper capacity than almost any other
physical commodity market, it was a perfect target for bonus seeking traders who
have also profited (some of which are now being prosecuted or investigated) in
the manipulation of Libor and Foreign Exchange rates.
The price decline in paper gold has been met with a
surge in physical demand worldwide. The most dramatic image is the disparity
between paper and physical gold, which is depicted in the chart below showing
the premiums over paper gold prices paid in China for physical.
While China is by far the larger market, U.S. coin
sales are exceptionally strong as well, surpassing volume at the 2011 price peak
by 23%. The conclusion we draw is that the paper market has severely mispriced
gold on the downside. The physical market indicates a shortage of gold at the
same time the paper market is extremely short.
In April 2013, Dutch banking giant ABN Amro notified
clients that they would no longer be providing physical delivery of precious
metals including gold. Claims would be settled in cash with account balances
adjusted by the prevailing bid prices “offered by merchants.”???? The bank
explained that new custodial relationships would no longer allow physical
“extradition.”
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