Paper vs Physical Gold & Silver And Why The Precious Metals Sector Should Rally

What do the banks know that we do not yet?

by Dave Kranzler of Investment Research Dynamics

I had an interesting dialogue with a couple of long-time colleagues about this commentary by Wall Street On Parade.  The Martens do an admirable job exposing the corruption on Wall Street, the Fed and Congress. But they exhibit a profound misunderstanding of the architecture of the global market for gold and silver. In the title to that article, the Martens suggest that “the typical safe havens of gold and t-notes are losing money.”  Well, yes all flavors of fixed income securities are losing money because that’s how bond math works when interest rates and bond yields rise. However, the Martens fail to understand that the gold and silver market is bifurcated.

One side of the market is the paper derivatives markets on the Comex and LBMA as well as OTC derivatives. These markets are opaque, fraudulent and a source of fantastic profitability for the banks that use the products to manipulate the prices of gold and silver. For now, the paper market is dictating most of the price-action. And it’s not just the banks. The hedge funds have been dumping tens of thousands of gold and silver paper contracts on the Comex. This can be seen in the weekly COT reports, which show that the hedge funds (Managed Money segment) are increasingly adding to their gross short position and reducing their net long position.  The hedge funds have been net short paper silver for several weeks. Their recent net short positioning in paper gold is the largest in memory.  Conversely, the Comex banks (Swap Dealers segment) have swung from a big net short position to a net long position in paper silver and they are aggressively covering their short position in paper gold.

The other side of the gold and silver market is the physical market. By this I mean the market in which large buyers – primarily eastern hemisphere buyers – are accumulating vast quantities of physical gold and silver and require that the metal is physically delivered to their possession/custody rather than remain in allocated and unallocated vaults in London and New York (Delaware, actually).  Central Banks, sovereign entities and the Indians are hoovering physical gold right now. Unlike the paper markets, in which Comex contracts and LBMA forward agreements can be printed as easily as digital currencies and Treasury bond certificates, there are not any large sellers of physical gold and silver that are identifiable. To be sure, gold and silver is brokered from producers to buyers via the bullion banks. And when delivery short-falls occur, the unallocated GLD and SLV accounts (sub-custodian accounts) are pilfered by the banks and shipped to buyers. But there are not any transactions globally in which a big holder of physical gold or silver is selling its holdings to the buyers.

The banks are not bidding aggressively to cover their short  positions. Rather, shrewdly let the hedge funds drive the price lower with an avalanche of selling/shorting and using that opportunistically to cover their short positions as the price falls. Shrewd gamblers know that when the “house” – or the dealers – are taking all bets placed in one direction for their own account, the game is rigged. What do the banks know that we do not yet?  This is a similar set-up to the final bottom of the precious metals sector in late October 2008, when the precious metals sector turned on a dime and shot higher while the stock market continued to head south quickly for six more months.

As mentioned above, the set-up in the markets is startlingly similar to that of late September and early October 2008.  Something stopped the selling of paper gold and silver back then – some trigger event – and the paper shorts scrambled to start covering, driving the market higher and setting off a 2 1/2 year bull move in the precious metals sector.  Whatever that catalyst was – and it was connected to the de facto credit market/banking system collapse – will be triggered again. It’s a matter of timing. The credit markets are melting down as evidenced by the devastation in the various fiat currencies.  Review  a historical chart of the dollar to see that the dollar soared – like it is now – in the summer of 2008, just before the financial system implosion. Based on behavior of the credit and currency markets, along with the glaring repositioning of paper gold and silver between the banks and the hedge funds per the COT report, I believe that a similar trigger event will occur in the coming months, possibly before Christmas.

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