Friday, January 17, 2014

Do You Wonder Where the Yellow (Metal) Went?*

A couple of weeks ago, I looked into the story behind Germany's attempt to repatriate their gold reserves.  In light of the Fed telling them they can't have it, and instead sending it to Germany in small installments over seven years, it seems obvious that it can't really all be in a convenient vault, as promised.  Most people have a picture in their mind of row upon row of gold bars, like this scene from Goldfinger (1964):
In reality, when Germany can't have the Fed officials just wheel a cart over to their gold and bring it to them, we have to wonder where the gold is.  One commenter quoted at GATA said, "you can't just load 300 tons of gold on an A380 and fly it back to Germany!", to which I say, "Like hell you can't!"  Do you really care if it takes more than one flight?  Do you really care if it takes a couple of weeks instead of seven years?

Over the life of this blog, I've often repeated a factoid I heard a few years ago that "China isn't buying gold; they're buying gold mines."  Today, I read an article on the precious metals markets "Is Now the Time to 'Back Up The Truck'" by Peter Degraaf which made this amazing statement:
This chart courtesy @KoosJansen shows the amount of physical gold withdrawn from the Shanghai Exchange (red bars), compared to the total amount of gold produced worldwide (yellow background). During a number of months in 2013 the Chinese bought every ounce that the mines of the world were producing.
You read that right.  They bought every ounce of gold produced in the world.  Linked to this report, which shows world gold production in yellow, and SGE physical delivery in red.  They bought more whenever the red bar is taller than the yellow.  
And that's almost an aside to the rest of the article, which focuses on technical analysis that says that it appears Gold has made its bottom in this current retrenchment phase, but the bull market is healthy and has years to run.  In the weeks since mid-December, gold has put up a couple of strong bullish signs: first, it hit a floor which it tested and never went below, and second, since September, it has been in a decreasing price channel, with lower lows and lower highs.  In mid-December, it broke out to the high side and has not returned to the channel.   These combine to give a positive forecast.  For the silver fans among us, the outlook is similar for the white metal.   

The societal factors that combine to make the future look inflationary (at best) also stand to benefit gold.  As I'm sure you've read lately, the number of people not in the US labor force has reached an all-time high of 91.8 million.  This will keep the pressure up for more transfer payments and more monetary stimulus.  More dollars bidding for every real asset: food, oil, copper, or steel, will inflate the prices.  Expect the precious metals to follow. 

Degraaf's article is full of technical analysis and impressive charts, and you should read the whole thing, but perhaps the most ominous chart in it is one of COMEX (Commodity Exchange) gold holdings.  Since the end of 2009, it has spent most of its time in the range of 1.8 to 3.0 million ounces of gold.  That supply has been dwindling since last spring and the last value reported in 2013 is just north of 416,000 ounces.  As he points out, "When this number nears zero, the COMEX will declare ‘force majeure’, and a number of traders who thought they owned gold bullion will have to settle for pieces of paper."  These people will not be happy. 

“But then, finally, the masses wake up.  They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The Crack- Up-Boom appears. Everybody is anxious to swap their money against "real" goods, whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.”   ….…Ludwig von Mises. 

*Everyone over a certain age, perhaps 50, certainly over 55, will remember that phrase! 


  1. There are many serious precious metal experts claiming that COMEX is already in default position, just not admitting it. Google "COMEX default."

    Apparently Germany has only received 37.5 tons of the gold so far indicating that the US Fed no longer has the physical commodity available in sufficient quantity to both return their gold and maintain a facade of having vast reserves of their own. Most likely, Ft. Knox is either empty or filled with gold plated tungsten.

    The US is already economically tits up and only showing minimal life signs via the manipulation of the strings by the puppeteers behind the scenes -- why do you think they are militarizing the police, buying tons of weapons and ammo, attempting to disarm the general public (before all of the sheeple wake up) and keep printing money with total disregard? It ain't because they're planning a party to celebrate the recovery of the economy -- ain't going to be any national hoedown....

  2. Training in engineering/physics just sort of keeps us looking at numbers and trends, eh? ...

    Maybe an equally important sign is the cost of our lowest denomination money: pennies of the cheapest base metals (mostly zinc) still cost more to make than 1¢ (about 2¢ right now). I've been waiting for the $100 bill to become the $1 bill. Chop a couple of zeroes and call it good (will 2 zeroes be enough?). The $1 bill becomes the new penny. Quarters are slugs to operate some machinery - but that's about what they are now anyway.

    If the pundits that keep predicting the prices of gold and silver haven't bottomed yet are right, why the difficulty (and markup) on trying to obtain physical specimens of either?

    One dealer I work with buys back at spot. This is not a sign of declining value.


  3. I'll date myself, "...when you brush with Pepsodent."

  4. Never understood the fascination with gold. You can't eat. You can't use it. You have to convert it back to fiat to spend it. Not easy or quick to do either, you've got to ship it to a dealer, wait for your check (weeks), then cash it at a bank. Gold is simply useless for the average person, it's not even a good store of value since you must "time" it's purchase and sale quite right or you'll loose money. And then you've got that ridiculous hassle to convert it back into fiat in order to actually use it.

    Who cares what the prices of gold is? It's fabricated, manipulated and subject to all sorts of intervention, including confiscation. Gold bugs just don't get it. It's useless for all practical purposes for the average Joe. Sells at junk jewelery prices too in a collapsed economy. It's not "worth" anywhere near what everybody claims. It's a pain in the ass.

    There are far better alternative to gold. Invest in something you can actually USE.

    1. This actually would be a good post, so if you don't mind, I'm going to riff on this tonight.