When you look at the math, especially the supply/demand and inventory/delivery “math” there is only one question that remains. The question is not whether the precious metals are grossly undervalued. It is not whether supply can meet demand. It is also not whether known inventories can continue deliveries at the pace of the last couple of years. The only question which remains is when. When does the current unsustainable and lopsided (soon to be proven fraudulent which yes, includes “intent”) business model of the precious metals market blow up in a default?
China imported 900 tons last year and India roughly 800 tons versus total global production of 2,500 tons, did the rest of the world make due with only 700 tons? Hardly. So far this year through March, China has already imported some 372 tons putting them on a pace of 1,500 for the year. This figure does not even include April where we know that VERY conservatively their appetite increased by 50% from the previous month which was just over 220 tons. So through April a conservative number would be 600 tons for the trimester making an annual pace of 1,800 ton for that country ALONE!
So where is all of this gold coming from if mine supply cannot satisfy the current and apparently exponentially growing demand? You can look at the numbers from the Shanghai exchange. They reportedly delivered 1,900 tons in 2011 and 2,400 tons in 2012. So far this year they have delivered over 1,000 tons. We also know that the COMEX, GLD, JP Morgan and HSBC inventories are being seriously bled down. Not by “leeches” mind you, no, the current deliveries and drawdown of inventories is like open arterial wounds gushing into the streets. It has become so serious at JP Morgan that they report only to have 137,000 (just over a whopping 4 tons) ounces left of “eligible” gold for delivery.
Over the course of the last 2 months there have also been reports of investors withdrawing their “registered” gold. This has come about not because people “missed” their metal and wanted it delivered so they could see how shiny it was. No, these “withdrawal pains” (pun intended) have been requested because people are afraid of the gold not being there. They want control of their money and don’t want to be “MF Globalled” or “Cyprussed.” This mindset is adding to the “run” on inventories. The funny thing is this, IF the metal was not really purchased in the first place (Morgan Stanley… ABN Amro anyone?), these demands for deliveries will act as CURRENT demand. Call it “deferred demand” or anything you’d like, these requests for delivery will put further pressure on existing and real inventories OR on price as firms go out to actually buy the product to deliver.
As I said, when does the fractional reserve metals market fail? When does it end in the same fashion that every banking panic in human history has seen? When do investors change their gait from the current very brisk walk and break into an outright “run?” What is happening and will happen is absolutely no different than 2,000 or more years ago when the Goldsmith issued too many “credits” versus the amount of gold he was holding. The only minor difference is “scope.” 2,000 years ago there were no options, no futures, no derivatives (except for the letters of credit) and certainly no computers (except by those who built the Pyramids). The current and prospective “run on the bank (vaults)” is nothing new, only the scope is exponentially larger and the final action quicker when it arrives.