The last 4 weeks has seen huge and unprecedented global demand for both gold and silver. Between just China and India the demand was close to 400 tons of gold… then you add in the rest of the world. Compare this 400 tons (from just 2 countries) to the 200+ tons that was dug out of the ground over the same time frame. During this period we saw sovereign mints go into “ration” mode as they could not keep up with demand and struggled to procure the necessary volumes of blanks. We also saw “junk” silver supply completely wiped out with none available. Prior to the supply shut out, junk was well over $5-$6 over paper spot, or a 20-25% premium. Delivery times for both metals were stretched out 3-6 weeks depending on product.
Basically this “episode” has shown just how fragile the supply chain really is. While premiums have now slightly lessened and delivery times a little bit shorter I think it is important that you look at what just happened as merely a precursor or warning to what WILL happen. Here in the U.S. people are still sleeping for the most part, maybe not “soundly” but they are sleeping with the thoughts that “the government will never let it happen.” As long as current policies are continued, they ARE making “it” happen.
What we have just witnessed in merely a pre shock warning and a “roadmap” if you will, to what will eventually happen. A mad rush into the metals can begin at any time for any number of reasons. The list just keeps growing as does the fiat outstanding that will do the “chasing.” The problem is that as just illustrated, supply has no depth whatsoever and the bottom of the barrel has already been exposed. The next time a wave of buying hits this market (not that the current wave is done) may be the last time that the demand gets met by supply. Once supply is gone, it is gone. This is not like the banking system where a bank runs out of money and calls their central bank for more. It takes real sweat, labor, equipment and capital to dig gold and silver out of the ground. “Supply” doesn’t happen with the wave of a magic maestro’s wand.
Another “anomaly” in the precious metals market is that demand will actually increase if supply gets tighter or price begins to go exponential. This is the fear factor where once you are told “you can’t have that because there isn’t any available” makes you want it even more. Forget about greed, “fear” is what will take the physical product out of the market. It could be anything that tips the scale. It could be a European sovereign or a bank. It certainly could be the Japanese bond market that is currently in crash mode. It could be further QE in the US or a slowdown of QE. It could even be that US “goodwill” fails because of the Benghazi and IRS sleights of hand. It could be anything from anywhere on the planet, it could be as minuscule as an ATM machine running out of cash in the tiny country of Luxembourg. The financial forest is tinder dry while politicians, bankers and alchemists of modern finance the world over are throwing cigarette butts and fireworks in all directions.
I know that I must sound like a broken record here but supply cannot meet demand which is THE most basic premise. Supply has had to come from somewhere and that “somewhere” now has less inventory than it did just one month ago. How many more body shots can the supply take? I don’t know the answer to this question, I do know that sooner or later a run on the bank is a certainty and that the bank does not have unlimited supply. Don’t be one of those who will say “woulda coulda shoulda” because you still can… for now.