In my previous missive, I tried to illustrate the supply side of gold and how the movements of inventory have recently changed. In this part, we will look more to the demand side with a wrap up of why it truly matters “whether the gold is there” or not.
From a demand perspective, we already know China is buying the entire global mine supply of gold on their own. We also know India is very big buyer purchasing almost 40% of global supply. Adding just these two together we come up with 140% of new gold being spoken for. I believe there is now a new “bidder” coming to the table, Europe! The euro is crashing versus most all foreign currencies. Whether it be because of the fear of their breaking up (Greece exit etc.) or whether it be their poor financial condition or the new announcement of huge QE debasement, it does not matter. What does matter is the action of the euro.
As you can see, gold has exploded in terms of euros. In fact, in just the last two months gold has risen more than 25%. As I understand it, Europeans look at gold differently than we Americans do. They understand it better but look at its price less often. The typical charting in Europe looks mainly at month end closes, if there are huge swings during the month yet the price did not move up or down a lot when the month was finished then “nothing much happened” in their view. Gold has now broken out wildly to the upside and will have two back to back “big” monthly price gains. This will alarm many Europeans who will now become buyers. This is perfectly natural behavior, when your currency is being debased, finding a safe have to protect your purchasing power is what it all boils down to. (This same thing can be said regarding many other currencies, the Canadian dollar, the pound, the yen and so on). I believe the demand for gold (and silver) coming from Europe is about to explode! This demand will not be spurred by “greed”, it will be spurred by the emotions of self preservation.
From a global standpoint I also see the very real potential for an explosion in demand for these very same emotions of self preservation. We could get into the hypothetical of what will happen when the dollar does again weaken, this is not the direction of my thoughts currently but an interesting topic because the day will come. If you look at just the last six months volatility in so many derivatives markets and what has already happened, there are dead bodies out there similar to “A weekend at Bernie’s” if you will. There are really five major “fashionable” carry trades out there which hedge funds have piled into…all of which are blowing up at the same time. First we have the short dollar/long oil and commodities trade, there are two more trades “long” commodities trades where the short (funding side) is Swiss francs and another which uses Japanese yen. Another carry trade is long the dollar and short the 10 year Treasury which is a bet on higher rates. The last one I’d like to mention is one which began sometime in 2012, long the Nikkei index and short gold. ALL of these trades are blowing up to one extent or another and the losses are now in the $ trillions!
We are told “not to worry” because everyone is hedged and “CDS” (credit default swaps) insure everything … so no one can get hurt. I am here to tell you there are two sides to every trade and two side to every CDS. As I have said all along, “volatility is a killer” because if someone loses SO BIG they become insolvent, the winner becomes a loser when he cannot be paid. This is exactly where we are now. Liquidity is drying up at the same time volatility is increasing, a deadly combination. As for the farcical CDS market, what will happen if Greece just decides to default? What if they decide to exit the Eurozone? What happens to these CDS which will need to be paid out with actual cash rather than carried on the books at some fictitious level? Will we continue to see default not ever “declared” a default? In the case of Greece, they no longer even have the ability to pay, how can this not be declared a default?
All of the previous leads us to THE biggest demand factor for physical gold purchases of all, FEAR! In a situation where defaults are cascading, gold will be sought after because it is THE only money on the planet which cannot default. The demand will be staggering and record setting …THEN our question of “is the gold really there” becomes of utmost importance. The very real distinction between paper gold and real gold will be wider than the Grand Canyon! We will see further physical demand come from those who are currently “comfortable” because they believe they have gold as a “hedge” or safe haven. You see, it will be at this point in time where the floodgates of demand open. Not only will demand be coming from every possible angle in a flight to quality, the 99 out of 100 who “believe” they own gold will also be scrambling for the real deal!
To wrap this up, “is the gold really there?” has not to this point mattered. It has been always “assumed” to be there and it is “believed” to be there …otherwise we live in a society with no law, right? No one in their right mind would represent they have physical gold if they do not because they could go to jail …right? In my mind there is no “fact” more important than “the gold being where it is supposed to be”. Even though (and because) the world for the first time is no longer on the gold standard, “having it” still matters. It matters for several reasons. First, not having gold while proclaiming you do has worked for many years because no one questions it. No one has truly questioned gold ownership because gold does not “flow” as it once did to settle trade. Now however, questions are being asked and even nations (think Germany and Netherlands) are making calls on their vaulted gold.
More importantly, China has been accumulating gold and financial/economic power. There can be no mistaking what their ultimate intentions are, China will “remonetize” gold in an effort to bring truth back to finance. When gold becomes “important” again, really and truly having it WILL matter. “Trust us” will no longer be good enough, proof will be required. A “chicken or the egg” moment will arise. Gold demand will explode either out of financial fear of the actions in paper markets or …it will explode because the revelation is uncovered the “gold really isn’t there”.
You see, the very small (in relation to paper) gold market is where “we came from” in the first place. The entire paper edifice was originally built off of a foundation of gold. All debt, all currency, all derivatives and all wealth has been leveraged off of the 1971 “foundation”al assumption that the gold is in fact “there”. When it is discovered that in fact, the gold is long gone and at least 100 ounces of paper gold has been sold for each single real ounce in existence, confidence in everything built from this foundation will crumble. Think about this, even the average guy in the street will be panic stricken. The average guy in the street will think “what do mean my bank doesn’t have any gold”? Even the lowest of IQ’s will understand what is meant by “the gold isn’t there”. How does trust survive even overnight when it turns out the gold is gone?
Please understand how important this question “is the gold really there?” is. It matters not, what the answer to this question is …until it is asked. If no one asks the question, the ugly answer can remain in the dark as it has (publicly) so far. I however contend the world has been quietly asking this question for at least 6 years. This is why demand has increased so dramatically. The decision was made by the Chinese et al that in fact the gold really isn’t there and have been acting upon this assumption. They did not “pull the plug” and call BS on the U.S., they kept smiling and quietly accumulating gold, real gold. What has happened is the equivalent of counterfeiters printing up and selling 100 billion shares of IBM. It won’t put IBM out of business but it does mean many investors own “something worth nothing”. The astute investors who see value in IBM’s depressed stock price and have “real” shares delivered in hand to them will benefit, those holding the fake shares will pay the penalty.
Simply put, the world runs 100++% on confidence, what will happen to this confidence when it is discovered the gold is gone? This is why I and many others harp so often on supply and demand. The “supply” cannot be there if the demand is truly as high as reported. One or the other must be wrong. In my mind, supply is finite while demand is potentially infinite because central banks can and have printed $ trillions. These $ trillions are all potential demand on supply and making a “call” every single day. May God help us all when this fraud is discovered and confirmed, our lives will be changed forever! This is not about a “bull market” or $1,000 dollar move in gold or a $30 move in silver, this is about the biggest transfer of wealth in all of history and control of “all the marbles”. You must understand this most basic of concepts to understand why you must own as much gold and silver before it is discovered “the gold is long gone”. The truth is really going to hurt!