Supply is first to go away… then goes price. We saw back in 2008 the very same scenario as we have today only in a milder form at the time. Supply of metal became very tight as the paper price was crashed, then all of a sudden we made a bottom and higher prices were what came in the aftermath. That was then; this is now.
Then, governments far and wide stood up and “guaranteed” everything from A to Z. Bank accounts, money markets and of course the banks and brokers themselves. They did this because they could. They did this because they had to, otherwise the financial markets would have ended as one big smoking hole of default which would have brought with it a deflation. It would have taken all paper currencies with it. Back in 2008 there was no thought that governments themselves could go belly up or default (I did write a piece titled “Fannie and Freddie in the lap of the U.S. Treasury”). Since then we have seen nothing but a string of default after default. Yes I know, only Iceland, Greece and Cyprus have “technically” defaulted but what do you call what the U.S., the EU, Japan and Britain have done with their money supplies? It is called “default” through debasement of their currencies no matter how you look at it.
Here we are in 2013, right back where we were in 2008… only worse, much worse. The derivatives mountain has scaled higher highs, debt burdens and ratios are far uglier, the collateral to the banking systems more hollowed out and the banks using pure fictional accounting to keep their doors open. Here we are nearly 5 years down the line and sovereign governments themselves are broke. So broke that “saving the banks” is no longer an option because the problems are too big and the treasuries to weak. There will be no more bailouts, now we look forward to governments “dipping” into account balances to save the banks while holding guns to our heads and telling us we can either lose it all or 80-90%. Take your pick.
I started this piece with “supply is first to go…then price.” 5 years out from the 2008 experience brings with it at least 2 things, more money sloshing around and less supply held to take care of the annual shortfall. There is an annual shortfall of somewhere around 1,500 tons per year between the demand of 4,000 tons and mine supply of roughly 2,500 tons. In the last 5 years it is safe to say that somewhere between 5,000 and 7,500 tons of (un)official Gold has been dishoarded. Of course, demand has now exploded again in the sellers face so the deficit is widening and delivery default is becoming a very real possibility. As I mentioned, there is more money sloshing around than there was 5 years ago… AT LEAST twice as much if you look at money supplies, debt outstanding and of course the always pointed to equity markets. More money chasing the same or lesser supply is the equation we have now in a financial system that is on far shakier ground than it has ever been. Like I said, “PRICE” is next to go!