Friday marked the end of two straight weeks where the GOFO rates were negative. Over the weekend, Reuters finally put out an article titled Gold futures hiccup indicates demand outpacing supply explaining this. So it must be true since the mainstream finally says it is. Right? All kidding aside, this is no laughing matter because once this situation goes full blown there will be no going back because confidence will have already broken.
What is happening is that investors are pushing back against the “fractional reserve” paper gold market. Put simply, they are valuing gold in hand now, at a higher price than a futures price locked in by a contract. Whether it is because investors are skeptical that they won’t receive their gold because it’s not there or they don’t trust the counter party (for good reason), it doesn’t matter, “trust is breaking down.”
We also got word late on Friday that JP Morgan had a withdrawal from their customer inventory of 90,000 ounces. This was a 66% drop and has left the inventory at a laughable 46,000 ounces. Was this to settle contracts that were due in May and June? Probably, but we are now staring August directly in the face with potential settlements greater than the inventories of JP Morgan, Scotia, HSBC and Brinks combined. The potential for an historic short squeeze in the gold market has never been greater, I think we will soon find out who really has it and who doesn’t.
I do want to pick on our chairman of the Federal Reserve just a little more because he reached a new high in disinformation and a new low in stupidity in front of the Senate Thursday. He said, and I quote, “Nobody understands gold prices, and I don’t really pretend to understand them either.” Really? Nobody? But wait, why would you even answer any questions or even speak about gold? It, according to you, “is not money” and Lord knows since you are “the chairman” who would know the definition of “money” better than you?
Regardless of what Ben Bernocchio says or wants people to think, we are (and have been for more than 3 months) witnessing a bank run. This “bank run” is not on any one single bank, it is on the system itself. Inventories being drawn down, custodians refusing to deliver and even sovereigns making claim to their gold shows that a choice has been made. The negative curve (backwardation) is proof positive that investors are voting with their feet and saying, “I want my gold, real gold, and I want it now…I will not accept any substitutes.”
As we have said all along, the paper markets have written receipts for more than 100 ounces for every one real ounce that is available to deliver. How do you suppose this is going to work out? I guess the best way to explain this is by asking a question or two. What do you suppose will happen to the value of 1 real ounce of gold when it is learned that “supply” was overstated by more than 100 to 1? Or another way, what will happen to the price of gold when it is discovered that gold is 100+ times more scarce than it was commonly believed?
You see, what was “supply” really wasn’t even though it temporarily acted that way (on price) but it will now be flipped into demand, real demand for real gold…no substitutions. Not only will those who are contractually short need to cover and compete with natural demand, those who “thought” they had the bases covered will become buyers to buy what they “thought” they already had. This will work not only like a high horsepower motor, you can add the turbo charger (short covering) and a NOS shot of another couple hundred horsepower when “owners” find out that they are only holding an empty paper bag.
There is now virtually no question in my mind whatsoever that we have a short squeeze and a wipeout “run” on inventories coming. I believe that a $200-$300 week is coming shortly that will be followed by Reg Howe’s “You’ll go to bed with $1,500 gold and wake up $4,000 bid and nothing offered.” What will you do then? Sell? Buy what is no longer buyable? It’s a good question which I will broach later this week.