Professor Antal Fekete wrote into Mineweb last week regarding the concept of “permanent backwardation” where gold will “tend to infinity and paper to zero.” Mr. Fekete’s piece was commented on here by Lawrence Williams. This viewpoint is one from the “academic” side and is exactly the same thing that Jim Sinclair has been saying. Namely that the metals “exchanges” will go to 100% margin and end up as cash and carry transactions.
Let me try to simplify this view (and one that I believe to be 100% on the mark). The current backwardation is the result of enough market participants finally figuring out what has been happening for years now. Central banks have leased gold out yet still kept that gold on their books. The result was that “supply” and availability appeared to be far larger than it truly was. Gold was leased and then sold into the market. It was still shown on the books of the central banks and ALSO on its new owner’s books. We also have seen “pooled” accounts and ETF’s where the metal turned out not to be there and may (probably) never have been purchased in the first place. The same ounce of gold was “sold” time after time and over and over. Gold was here…there…and everywhere. As the author so aptly points out, people started to wake up when Germany was told to wait 7 years for their small amount of gold to be delivered. (As a side note, please also remember that when physical gold is sold, 70% of it gets melted down and becomes either jewelry or is “used” in products so that it is no longer in deliverable form).
The above said, investors are now wondering “Where is the gold?” and they don’t like the answers they are getting. They are “voting” with their financial transactions. Investors are going to “cash and carry” on their own. They are buying physical metal and asking for delivery, they are also either buying less or outright selling “paper” gold products. This is creating a “two tier” market where the price of REAL gold is higher than “paper” which represents gold. THIS in essence is backwardation in itself and “premiums” paid for physical metal was an early warning. Investors want gold NOW and in hand because they either do not trust or believe that promises of future gold can or will be kept. This by the way is a self-fulfilling prophecy because there is only so much gold that can be had. The higher that current demand goes, the more those inventories will be depleted. The more that inventories are depleted the faster new demand to get it “now” becomes. Basically the recipe for a buying panic is evolving. This has taken far longer than I believed it would but it can be likened to the “flat Earther’s” viewpoint holding sway until Magellan (looked into empty vaults) and circumnavigated the globe.
I mentioned above that this process would become “self-fulfilling,” you are watching that happen in real time right now. More and more there are “light bulbs” getting turned on all over the world. More and more investors know that “something just ain’t right,” too many things don’t make sense and investors are reacting with their feet (money). This eventually had to happen as gold is a finite money and takes capital, labor and equipment to “create” while fiat currency whether they be Dollars, Euro’s, Pounds or Yen can be created at will, in any amounts…and for FREE!
I will ask you this, how could it ever be possible for any of these currencies to appreciate in the long term versus gold? For a “time” the illusion of appreciation can be maintained and it was from 1980-1999. “Pressure valves” were invented (ETF’s, unallocated holdings and pooled accounts, futures, etc.) and used to create the “tops” which were pointed at as talking points of proof. “Proof” that the bull market was over and the time to exit gold and “come back into the system” had arrived.
This worked in 1980 and for 20 years after. We still had the ability to lever up anything and everything not nailed down, the “paper” products were still yet to come on the scene and central banks still had the ability to lease the family jewels. These tactics have come, been tried, used and abused. Now we face “permanent backwardation” where gold in hand is valued higher than gold “in the future.” Simply put…a two tier market where real gold is worth more than the “promise” of gold in the future and worth more than any piece of paper representation of gold. While this is still just emerging, it will become more and more noticeable in price. …And the more noticeable it becomes…the faster it will happen. Like I said above…the recipe for a buying panic! …please remember that “supply” is absolutely finite in a world where demand can be virtually infinite so “guessing” at a price…any price…is at best a “guess.”
One final thought, if there was no gold to be had at the mint or from refineries, if the mines just sat on and held their production, if your coin dealer could not source metal and no one was offering gold for sale either privately or over the internet, what would an ounce of gold be worth? The answer is “a lot.” How much exactly no one knows but during a reset of price there will be no trading…until a new price balances out and coaxes enough sellers out of hiding to meet the buyers. You MUST be in position before this happens. 5 years, 6 months or even 1 second too late will equate to the rest of your lifetime!