Monday, June 4, 2012

Precious Metals: The Plain Truth About Physical Supply

Jeff Nielson, at Bullion Bulls Canada , has got to be one the most underrated and under appreciated writers in the Precious Metals space.  His recent series of essays, "The Three Trends Which Rule The Precious Metals Market", for those interested in understanding the true disconnect between the CRIMEX futures market in New York and the REAL supply and demand fundamentals of "physical" Gold and Silver, are an absolute MUST READ.

The Three Trends Which Rule The Precious Metals Market, Part I

Written by Jeff Nielson Sunday, 27 May 2012 13:41

It is bad enough watching the talking-heads of the mainstream media undermine the precious metals sector with their insipid and invariably flawed analysis. However, what is positively infuriating is when these drones manage to influence the market through parroting “fundamental” factors which (at present) are simply irrelevant.

Understand that in normal markets (and normal market conditions) that there would/should be a host of variables which influence the precious metals market – as with any other market. However, what has been completely lost in all the white-noise coming out from the mainstream media is that conditions have literally never been less normal.

Specifically, not only our markets but our entire economies have been perversely warped through pursuing (or simply allowing) the most extreme policies, and the most extreme behavior in our markets in all of history. These extreme policies, and the extreme behavior they have spawned now totally drown-out all other factors, even many of the most basic elements of supply and demand. Indeed, the ultimate proof of the cluelessness of media drones (and the mainstream “experts” who feed those drones) is the fact that none of them have even the slightest awareness of how economic fundamentals have been skewed in such an extreme and flagrant manner.

The purpose of this piece is to identify the three policy/behavior trends in our economies and markets today which either subsume any other factors, or simply render them (at the moment) irrelevant with respect to gold and silver. Understand that because the second and third trends are derivatives/consequences of the first trend that there will be considerable overlap here, so readers are encouraged not to become side-tracked by issues of semantics. Those three trends are:

1) Excessive money-printing

2) Gross misallocation of capital

3) Long-term destruction of the supply chain

Excessive Money-Printing:

There is simply no other single dynamic in the global economy today (and specifically Western economies) which comes anywhere close to the significance of the utterly insane monetary policies which Western governments have allowed to take place. Indeed, so dominant have these forces become that no one (not even our governments themselves) find it the slightest bit noteworthy that the Money-Printers (i.e. the privately-owned cabal of Central Banks) now absolutely dictate economic policies to our (supposedly) sovereign democracies.

The most current and extreme example is Greece. Here the bankers (and their political servants) have made it clear that they are going to force one election after another unless/until the Greek people “elect” a government who will do exactly what the Bankers tell them to do: inflict more savage/suicidal “austerity” on that economy in order that the Bond Parasites can continue to receive their interest payments.

Understand there is no long-term economic “plan” of any kind for Greece, not even any theoretical hope for solvency. Instead, the entire purpose of forcing more austerity on the Greek people is to allow the Bankers to print even more money – which they will then lend to this totally insolvent economy. None of the media drones or their “experts” consider this at all unusual or inconsistent either.

However we can be much more general here. Currently, every significant economic policy being pursued by all of the West’s largest economies either directly involves more money-printing or indirectly involves more money-printing. Indeed, this has forced the bankers to continue to invent new euphemisms and double-talk on a near-daily basis – so that they have jargon they can use to describe these policies without simply saying “print more money” again and again and again and again.

Here the media descends into sheer stupidity. We have the media reporting on our governments (not just in the West but around the world) explicitly engaged in “competitive devaluation” – which literally means racing to see which government can drive the value of their currency toward zero the fastest (through printing more money). Meanwhile out of the other sides of their mouths we have these drones referring to one of those currencies (the U.S. dollar) as a “safe haven”.

Let me see if I can construct an analogy simple enough for the media to understand. Suppose all of their favorite Wall Street fraud-factories announced that they were going to engage in “competitive devaluation”: printing up more and more shares for the sole purpose of diluting the value of those shares. Would the media drones and their experts search around for the “best” of those Wall Street banks, and then call it a “safe haven” to investors?

Hopefully not. Hopefully even the mediocre minds of the media would grasp the complex principle involved here: you never own an asset where the producers of that asset are deliberately trying to destroy its value. If the media ever became sane/competent, then as long as our governments kept talking about “competitive devaluation” the media’s automatic response would be “hold none of this paper”.

Yet instead of getting sanity/competency from the media, what do we hear instead? We’re told that investors should shun the 5,000-year safe haven represented by gold and silver because “in a weakening economy demand for the metals will fall”. Here it’s necessary to introduce the media to another concept: proportionality.

Any slight changes in demand for gold and/or silver (higher or lower) have now been rendered totally irrelevant with respect to being determinative of prices. In other words, the relative “value” of gold and silver due to changes in demand is being drowned-out by money-printing on a scale at least an order of magnitude greater. The problem is attempting to quantify the size of that differential.

Here the strategy of the bankers is simple. They have created so many different definitions for both “money creation” and “money supply” that they can now totally confuse any debate on this subject by throwing out several different definitions – some of which are literally contradictory.

Crucial here is that the bankers have managed to include wealth destruction within their definition of “money creation”. Thus while the reckless gambling of the bankers is destroying wealth (with their failed bets) on a scale literally a thousand times greater than at any other time in history, this simply allows them to more easily hide the obscene magnitude of all this new (theoretical) “money” being electronically created by these financial pirates.

Currency-dilution is the dominant economic trend of our era. The destruction in the value of these currencies (at the most rapid rate in history) means that any sane investment strategy must revolve around holding “hard assets” (beginning with gold and silver), since their value cannot be destroyed/debased as the underlying currencies are being (deliberately) destroyed by our governments.

The obvious example here is Western bonds. The “prices” for Western bonds become totally irrelevant nominal numbers – as our paper currencies are driven closer and closer to zero. Indeed, if we received any competent analysis of the bond market by the mainstream media their coverage would begin with the latest news on more Western currency dilution, with the nominal bond prices themselves (rightfully) being treated a distant second in terms of importance.

Sadly, readers are strongly advised not to “hold their breath” waiting for sanity/competence to return to the mainstream media. Instead, their only recourse is to simply tune-out roughly 95% of all mainstream reporting on our economies and markets, reflecting the fact that (being charitable) only about 5% of what is put out on a daily basis by the mainstream media has any relevance at all.

In particular, the moment that readers see the words “economic fundamentals” this is their cue to stop reading since (as I just finished demonstrating), the mainstream media doesn’t have the slightest comprehension of the nature of the real fundamentals in our markets and economies today. Their mis-reporting, along with the extreme distortions that all of this excessive money-printing has produced have directly led to the other two, dominant economic trends of our current era.
In Parts II and III, I will explain and explore the two trends in the precious metals sector which have become the consequences of living in the Era of Money-Printing.

The Three Trends Which Rule The Precious Metals Market, Part II

Written by Jeff Nielson Tuesday, 29 May 2012 11:08

In Part I, readers were presented with a list of the three trends which overwhelm all other factors and fundamentals in the gold and silver markets. The first and most dominant trend – the grossly excessive printing of (worthless) paper currencies – was explained to readers in detail.

Through elementary logic, we established that no rational investor would choose to hold these worthless paper currencies, rather than opt for humanity’s 5,000-year old safe havens: gold and silver. Specifically, with all our governments explicitly engaged in the monetary policy known as “competitive devaluation”, only an idiot would hold an asset where the producers of that asset are trying to drive its value to zero as rapidly as possible.

As I discussed in the first installment, the other two dominant trends are directly and/or indirectly derived from the first trend: the gross misallocation of capital, and the long-term destruction of the supply chain. I will focus on the second of these trends in Part II.

Here it is important that readers are aware that we are discussing two separate-and-opposite dimensions to this misallocation of capital. On the one hand, Western investors currently hold only roughly 1/10th the amount of gold and silver that they have normally held on an historical basis. In other words, at the point in time where Western investors should be choosing to hold more gold and silver than at any time in history they are instead holding less gold and silver than at any time in history.

Then there is the second and opposite misallocation. These zombie investors are not only loaded up with $trillions of our (worthless) paper currencies; they are also holding $10’s of trillions in bonds, issued by hopelessly insolvent Western debtors – and denominated in those same, dying fiat currencies. Here clueless paper-holders must step back and take a look at history.

In the 1,000 years since China began humanity’s experiments with these worthless, paper (“fiat”) currencies; the paper has a perfect record: it always goes to zero. Meanwhile, we are equally well-advanced along the road to another regular, economic event in our collective history: what I call a “bond-burning party” – where insolvent debtor governments simply erase all of those bond debts, leaving bond-holders with a big, fat nothing.

These bond-burning parties have more commonly been known throughout history as “debt jubilees”: one or more governments collectively or unilaterally decreeing that their bond debts no longer exist, and thus the “bonds” themselves become nothing but an inferior brand of toilet paper. They are regular events in history, but naturally most Western readers are totally unfamiliar with this common (and inevitable) historical trend.

Our paper-pushing bankers have made sure that their servants in government and the media never let the Sheep know that both the bankers’ paper currencies and the bankers’ paper bonds always end up as worthless paper. In fact, “debt jubilee” is a concept which literally dates back to Biblical times. Back then they didn’t wait for the bankers to officially bankrupt nations before declaring a debt-jubilee. Rather, they were scheduled events – every 25 or 50 years.

So we have our bankers telling us that both their paper bonds and paper currencies are “safe havens”. Meanwhile, 1,000+ years of our own history tells us that both forms of paper are certain to end up totally worthless. Obviously treating $10’s of trillions in worthless (Western) banker-paper as a “safe haven” represents a misallocation of capital on a scale at least an order of magnitude greater than anything else in our history.

For those deluded paper-holders who scoff at the idea of their precious paper becoming worthless “during their lifetime”: open your eyes. In little more than 40 years since the gold standard was abolished and our currencies fully became “fiat currencies” they have already lost more than 75% of their value. With “competitive devaluation” now our official monetary policy, that rate of dilution/destruction is increasing exponentially.

As for these equally worthless Western bonds, Debt Jubilee has already started. What do readers think just happened in Greece? One minute there was a stack of paper with a (nominal) value of $400 billion. The next minute the stack of paper was worthless. What happened in between? Debt Jubilee.

Understand that Debt Jubilee is now a mathematical certainty in the West. Nearly three years of Europe’s “austerity” has shown that none of these debtors is even capable of reducing the size of their deficits – let alone ever approaching a balanced budget. Absolute, empirical evidence that all of these Deadbeat Debtors are past the point of no return.

Across the Atlantic, it is common knowledge that the U.S. is even more fundamentally insolvent than Europe’s debtors. Meanwhile Canada’s new Conservative government has now made this nation even less solvent than we were when the last Conservative government mismanaged the economy into an official “debt crisis”.

Indeed, Canada is the perfect Illustration of both the level of Western insolvency and the degree of denial concerning that insolvency. As Canada again plummets toward insolvency, instead of being castigated for being in another debt-crisis, it is hailed by the duplicitous Western media as a paragon of fiscal prudence.

The day after (or maybe the same day?) our governments and media finally acknowledge that the entire Western bloc is effectively bankrupt we will have Debt Jubilee. By then it will be much, much too late for investors to rid themselves of all their $trillions in officially worthless bonds.

As for our paper currencies, if they haven’t already been rendered worthless by the excessive money-printing of our governments when Debt Jubilee occurs then the destruction of the bond market will complete that process. At that point, deluded paper-holders will finally realize the intrinsic value of ink on paper, just as the Dutch painfully came to the realization that the tulip was merely a flower – at the end of Tulipmania over 400 years ago. Today we are all “Dutch”.

The financial stampede out of the bankers’ two equally worthless paper instruments will mark an exodus of capital totally unprecedented in our history, assuming that our governments don’t simply decree all that paper to be worthless before the stampede even begins. Just as the money-printing of the bankers dwarfs all economic fundamentals today, the Flight out of Paper will dwarf all other fundamentals tomorrow.

Then there are the tiny, grossly under-owned financial Lifeboats in which our species has sought refuge in times of crisis for nearly 5,000 years: gold and silver. On an average historical basis, investors have held between 5% and 10% of their financial assets in gold or silver, with that ratio tending to rise dramatically in times of crisis.

Yet today, as the clueless paper-lemmings charge toward the looming financial chasm ahead; gold and silver represent only about 1% of the average (lemming) portfolio. What happens on the day when even the lowly lemming realizes that their precious paper is worthless – and only gold and silver remain as “safe havens”? Picture a million elephants trying to squeeze through the eye of a needle, simultaneously.

The creators of all this worthless paper (our central banks) aren’t waiting for that stampede to begin. They are already dumping their worthless paper for gold at the fastest rate in 50 years, and by the end of this year that will likely have escalated to the fastest rate in history, as the gold-buying by central banks continues to accelerate.

We have our governments, the official owners of these paper currencies openly stating that they are trying to drive their value to zero as quickly as possible. We have the creators of that paper, the central banks, swapping paper for gold as fast as they can (without spooking the herd into a premature stampede).

Then we have the Corporate Media duping the hordes of lemmings into continuing to hold this worthless, obsolete paper – so that the bankers can buy their gold first (and cheaper). Indeed, the malevolent media propaganda machine has gone much further. It has fraudulently referred to gold and silver as “bubbles”, despite never being so under-owned by Western investors in all of history.

The only evidence offered by the media to justify this lie are the (nominal) prices of gold and silver – priced in relation to worthless paper. If I was under the delusion that sand was a “currency”, and I tried to buy some gold or silver with a truck-load of sand then using the media’s logic I would have even more “evidence” of a gold bubble.

Apart from shattering the lies of the media about a gold bubble with simple and obvious logic, the behavior of our central banks is an irrefutable rebuttal to the media’s propaganda. It is this same media which hails these central bankers as the ultimate sages of our financial system, and their message is clear: dump your paper and buy gold (or silver).
In Part III, we will explore the third dominant trend, and the reason why there is so little gold and silver available to global investors: the long-term destruction of the supply chain.

The Three Trends Which Rule The Precious Metals Market, Part III

Written by Jeff Nielson Friday, 01 June 2012 11:18

At the beginning of this series I acknowledged that there was considerable analytical overlap among the three trends I would discuss and explain. In Part II, readers saw how the imminent Flight out of Paper will be a direct consequence of the excessive money-printing we are seeing today, along with maintaining artificial/fraudulent prices on the bankers’ paper currencies. Creating a massive imbalance today will lead to an exodus of capital tomorrow.

Similarly, in Part III we will see how the long-term destruction of the supply chain for the gold and silver markets is also a consequence of excessive money-printing. However, while the Flight out of Paper will be a direct consequence of excessive money-printing, the destruction of the precious metals supply-chain is an indirect consequence of excessive money-printing – along with price suppression.

The dynamic here is as simple as it is irrefutable: low prices cause high prices. What has caused the 10+ year bull-market for gold and silver, where prices have begun to move toward their fair market value? It was the 20-year bear market, where both the price of gold and the price of silver were driven well below the cost of production for approximately 90% of the world’s gold and silver mines.

Obviously the lower prices went, the fewer miners would/could choose to remain in production. So at precisely the same time that extreme/artificially low prices for gold and silver were stimulating more demand, those low prices were also destroying supply. The inevitable result was the collapse of inventories.

In the typical short-sighted manner in which the banking cabal operates, they had an “answer” for the collapse in mine-supply: dump their bullion onto the market. Thus to temporarily shore-up inventories (i.e. the metal immediately available for sale) the central banks emptied out their stockpiles of bullion, dumping thousands of tons of gold and silver onto the market over those years.

This brings us to the year 2000, and the turning point in the bullion-manipulation game. The supply/demand fundamentals for gold and silver had been warped to such an extreme that the price of gold and silver began rising even while the bankers were continuing to dump 500 tons of gold per year onto the market – the most extreme gold-dumping in all of human history.

Indeed, to illustrate how radical that gold-dumping campaign was we need only look at the media propaganda which accompanied the one-time sale of 400 tons of gold by the IMF in 2009. For a year and a half (as the banksters struggled to have the sale approved) we were subjected to endless media fear-mongering that this one gold-dump of 400 tons would ‘tank’ the whole market.

As informed investors know, the reason why the banking cabal was so desperate to get hold of some of the IMF’s gold is because the gold-dumping by the Western banking cabal screeched to a halt in an incredibly abrupt manner at precisely the same time. One minute these central banks were continuing to dump hundreds of tons per year onto the market, the next minute they were refusing to sell a single ounce.

There are only two possible explanations for this extremely abrupt collapse in the bankers’ gold-dumping. One explanation is that Western central banks have completely exhausted their gold reserves (despite the unaudited reserves these banks claim to hold). Supporting that explanation we have the tireless efforts of GATA in drawing attention to the massive “gold leasing” campaign in which the banksters have simultaneously been engaged.

The central banks love to “lease”gold. Why? Because they can deliver gold into the hands of their minions to be shorted onto the market (and gone forever), while the fraudulent bankers are allowed to pretend they still “own the gold”, even though all they now hold is a (paper) “gold IOU” which could never possibly be redeemed. The central banks are not even required to keep formal records of this leasing activity, so in all the years they were (officially) dumping 500 tons of gold per year onto the market with their sales they could have been dumping even more bullion than that via leasing.

The other explanation is that the central banks decided that their remaining gold was so grossly undervalued (versus their overvalued paper) that these greedy bankers simply refused to part with any more of their gold at the “cheap” price of $1000/oz (at that time). Indeed, if that theory holds then the bankers were also unwilling to sell their gold at $1500 or $1600 or $1700 or $1800 or even $1900/oz – because it was too undervalued versus their own paper.

Why would the bankers be willing to sell their gold for less than $300/oz in 2000, but unwilling to sell their gold at $1900/oz in 2011? Because the extreme/exponential money-printing of the bankers in the 11 years in between has diluted the value of their paper to that extreme. Thus the only two possible conclusions are either that all Western gold reserves have been exhausted, or the bankers themselves believe that the paper they are printing has lost at least 85% of its value in just 11 years.

As noted in the previous installment, today central bank gold-buying has already accelerated to the fastest rate in 50 years, and (at the current rate) will reach the fastest rate of gold-buying in history some time this year. In a span of less than 10 years, we have central banks flip-flopping from dumping their gold for paper at the fastest rate in history to dumping their own paper for gold at the fastest rate in history.

This brings us (at last) to the miners. With the price of gold at $1600/oz and the price of silver near $30/oz, we see the miners in their second (severe) depression in less than 5 years. Again there are only two possible conclusions we can draw from the collapse in the share price of the miners. Either the banking cabal has manipulated the share prices lower through their automated trading algorithms, naked-shorting, and other illegal/illegitimate tactics; or the market is telling us that with gold and silver at such low, low prices that it’s impossible for the miners to survive over the longer term.

Understand that we don’t even need to know which of these two explanations is the true one, since the consequence of both explanations is the same: the collapse in mine-supply at the same time that low prices have stimulated massive buying – in this case buying by the central bankers themselves.

The reason why the miners are struggling to stay afloat at these prices, and the reason why central banks consider the price of gold so “cheap” versus their own paper today is the same: because excessive money-printing has diluted the value of our currencies to such an extreme. Thus, the bankers' rate of excessive money-printing is now so extreme that the supply chain can collapse even with (nominal) prices steady.

Globally, mining exploration is now grinding to a halt. These are the “feeder” companies for the entire precious metals market. If they stop finding more gold and silver today, the miners will have nothing to pull out of the ground tomorrow. And so we are presented with the same inevitable, relentless dynamic which we saw in 2000: the collapse in supply causes a massive upward spike in prices.

The difference between 2000 and today is that 12 years ago the banksters still had thousands of tons of bullion to dump onto the market to temporarily fill that supply-gap. Today they have zero. At the same time that the safe-haven appeal of gold and silver is at its highest point in history (due to the rampant insolvency of Western governments), we have the bankers severely worsening the same supply-crisis which had already begun to manifest itself in 2000.

Today, however, with inventories stretched tight and stockpiles gone there is every reason to believe we are poised for an even more massive move in these markets than we saw in the first decade of this bull market. During that time, the price of gold soared by more than a factor of six, while the price of silver (where inventories/stockpiles are even more depleted) exploded by a factor of greater than ten.

I cannot say with certainty that the Depression for the precious metals miners will end tomorrow, or next week, or even next month. What I can say with certainty are the inevitable dynamics of supply and demand: every minute longer that the miners (and the price of gold and silver themselves) continue to be suppressed means that the next explosion for this sector will be that much faster/higher. The more extreme the supply-destruction resulting from the bankers’ excessive money-printing, the bigger the bounce in prices which is necessary to stimulate supply. We’ve all seen this movie once before, and we already know how it ends.
Readers will continue to be bombarded by the media propaganda machine with vacuous “reasons” why they should avoid gold and silver – and especially the companies which produce those metals (and leverage their price-gains). What readers have hopefully gained from reading this series is the knowledge that all that media blather is nothing but “white noise”.

Got Gold You Can Hold?
Got Silver You Can Squeeze?

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