Last year we watched as time after time gold and silver prices were raided lower. Each time was quite similar, often we would see huge volumes “sold” either overnight or pre market when the volume was at its lowest. These huge sales were undertaken when the fewest amount of buyers were around to absorb the sales…of paper contracts.
Precious metals bears will of course say, “It doesn’t matter, the sales were sales and if buyers were not present to absorb the sales then it just shows that there are more sellers than buyers.” Really? But what exactly is it that gets “sold?” Gold or silver? Or just “contracts?” Does the metal even exist that these contracts “represent?” We can look back at the year and clearly see what happened which should also give us an idea as to what “will” happen. I have long said that I believed a “two tier” market would eventually evolve where there is one price for “paper gold” and another for the real metal. This anomaly has already begun. The price of gold in India for example is very close to $1,500 per ounce which is somewhere close to a 30% premium.
True and unfettered “Mother Nature” would suggest that as the price of gold and silver have dropped, supply should be plentiful with all of the “sales.” This is not so. Gold and silver availability are as tight as they have been since 2001. GOFO rates are negative, refineries worldwide are working flat out, various mints have halted sales for lack of product and the big “warehouses” (GLD, COMEX and LBMA) have seen drops in inventory levels as never seen before. The “tightness” is also explained by the demand side. Perth mint recently announced that through November their sales were up 41% from 2012. We also know that China has imported about half of all gold mined over the year while the US mint saw record sales for both gold and silver.
This is just one “disconnect” where the painted “reality” makes no sense, common or otherwise. Another area where the reality has disconnected are the unemployment, housing and other economic “reports.” 1.3 million Americans had their benefits discontinued Jan. 1st… these people will (along with another 4 million as the year progresses) be “dropped” again. I say “again” because they will magically disappear from the unemployed numbers. They will become “discouraged workers” and no longer be counted as unemployed. While unemployment is reportedly around 7%, the real number as calculated “the old way” (truthfully) by John Williams is approaching 20%.
What about housing? Mortgage applications have collapsed as interest rates have nudged higher. This shows that the “ATM machine” has run out of cash and people are no longer refinancing. Of course on the other hand, we are told that deal after deal is being done with 100% cash…really? This “cash” is coming from foreigners who are dumping their dollars for real assets.
What about inflation? We are told that QE is “necessary” because inflation is too low. Again, really? I don’t know about you but my cost of living has increased dramatically. My health insurance rose 33% for this coming year after a 10% rise last year. Gasoline at $3.50 per gallon, this is nearly double in 5 or 6 years so this is close to 10% year after year. Food? Electricity? What about property taxes? Are any of these “crawling along” at under 2%? Is there maybe a little bit of disconnect between what is reported and what is real?
Another area that makes no sense are interest rates. Why are interest rates at historical lows (though doubled off their bottoms) if financial and debt ratios are as poor as they are. Actually “poor as they are” is the wrong term…I should say worse than they have EVER been. Why would rates be low if “risk” is at all-time highs? Another disconnect?
I probably should have titled this piece “The Great Lie” because that is what we are living. Nothing is as it’s portrayed and nothing is portrayed as it really is. The answer to anything and everything is “because” and then the fingers point to the bond markets, stock markets and gold with an immediate “see, the stock market is up, interest rates and gold are down.” Nothing that “passes” today as normal would have even been dreamed of 30 years ago. We have disconnected (lied to) ourselves from the basic truths of Mother Nature. The eventual “reconnect” will bring the ugly truths with it as is always the case…ALWAYS! The current episode is no different from any manias in the past with the exceptions of size, duration and ingrained belief. The current disconnect (mania) is larger, lasted longer and engulfed more of the global population than any prior credit bubble. This will be the “big one,” ready or not!