By Jim Willie CB
Dec 27 2011 12:43PM
Divergence between paper gold and physical gold price is happening, the process begun. Actual physical shortages have kept the price up. Various tactics have kept the paper price down. The fraud cases and lawsuits make for unfavorable publicity for the COMEX. Trust has vanished along with private accounts. The economic deterioration and asset market downdraft have led to margin calls, loan payment obligations, fading investor confidence, negative sentiment, and a desire to avoid loss. Hence the huge liquidity concerns, selling of good assets that command a strong price, and central bank encouragement of gold sales even with lease. These forces conspire to push down the gold futures price from the discovery process, called the paper gold price. The paper Gold market is very different in its internal dynamics from the physical.
On the other side is the desperation among central bankers to cover debt securities up for sale or rollover funding. They resort to utter hyper inflation by monetizing the many types of government and agency bonds. They are obligated to aid their banker cohorts in buying impaired bonds of diverse type that have proved toxic. The compelling need to stimulate economies, to redeem toxic bonds, even to recapitalize and nationalize the big banks adds to the monetary inflation outcome. Therefore, two sides are in opposition in the quintessential battle between monetary hyper inflation and restoration of bank system integrity to avert collapse. The chronic insolvency has recently met rising illiquidity. The desperation is setting in. The gold cartel has benefited significantly from the fresh Libyan gold supply (144 metric tons) and Greek gold supply (111 metric tons), not to mention the ample Dollar Swap Facility. It is the bankers New Gold, with destabilizing need for replenishment. The fresh supply from the two broken nations has greatly aided the COMEX, enabling new sales, aided by negative gold lease rates. The strong forces on each side push the divergence wider between physical and paper gold price.
Add some strange pepper in the dynamics. The inelasticity on the supply side is prevalent in the paper market, while the inelasticity on the demand side is prevalent on the physical market. As price falls, the mining firms are stuck with a liquidity crunch on their forward sales gone bad, urged on by Wall Street advisors. A huge amount of money is required to cover their losses. Their mining operations suffer from lack of funds, and projects are curtailed. The high gold price entices rogue governments to nationalize their gold industries, reducing supply further. The incompatible forces work to pull the COMEX in two directions.
ILLICIT USAGE OF CLIENT FUNDS AS COLLATERAL
The hypothecation battle will bring sufficient publicity to aggravate the divergence. As more assets are seen as involved in the illicit collateral security grab process, the physical assets will be removed from the system for basic self-preservation. The client funds have begun to flee, in reaction to the MF Global crime scene. Investors are pulling money out of hedge funds at a rapid rate. The COMEX will be increasingly isolated. Clients funds were redeemed to the tune of $9 billion in October, almost four times as much as they pulled in September, according to Barclay Hedge and TrimTabs Investment Research. The redemptions are the largest for the hedge fund industry since July 2009, when $17.8 billion was returned. The Barclay Hedge office put lipstick on the mongrel by commenting on how investors have lost patience with lackluster investor returns. The other half of the story resembles a crime scene.
DYNAMICS OF PAPER VERSUS PHYSICAL BASIS
Grand divergence dynamics are becoming clear. Ann Barnhardt explained in detail how the COMEX will not default, but rather fall into irrelevance, as it is shunned from lost trust. She laid it out in credible detailed form with numerous factors coming to play. The physical basis market has separated from the paper futures market. The consequences and implications of the recent major scandal are far reaching. The harsh forces from the MF Global failure and theft of private segregated accounts will arrive in time. Hundreds of COMEX clients were denied the chance to receive delivery of Gold & Silver, only to see their accounts go missing, their pockets picked. On its face, evidence mounts that JPMorgan simply converted 614k ounces of MF Global client silver into JPM licensed vaults. Witness evidence of cash and metal theft in plain view.
Ann Barnhardt explained how the COMEX will fade away into oblivion. Its final chapter will be marred by a grand price divergence, where the futures market price declines from avoidance, while the cash physical market price holds steady then rises. The expected Jackass path of drained inventory, a slew of lawsuits, and shutdown appears not to be in the offing. The MF Global fallout reveals the alternative route occurring. The MFG backlash is in progress. The COMEX will likely be ignored from distrust of delivery and suspicion of further thefts, as clients remove funds and close accounts.
Barnhardt offered many cogent arguments with detail on the entire process. Here are her main points. They apply to Gold & Silver. She runs the Barnhardt weblog: http://barnhardt.biz/
- Arbitrage is set to kick in. Players will buy at the cheaper corrupt paper market in COMEX and sell in the higher honest physical market.
- The connection between the futures markets and the underlying cash physical market is being lost. No longer are such holdings considered safe, trust gone. Ownership of bars is in dispute. Arbitrageurs exploit the market interaction dynamics evident in price gaps.
- As players flee, the paper futures prices will decline. The cash physical market will hold steady. The divergence will come. The physical market will then dominate from trust. The cash dealers will ignore the futures prices, no longer a valid price discovery. Later, they will even raise the physical prices. Then later still, the parabolic spike comes for physical Gold & Silver.
THE GREAT SHUN BY MINERS
Asset management funds are appealing to mining firms for direct metal supply. They are bypassing the COMEX in a new trend. Miners seek a fair price and the funds seek a reliable supply. The Sprott Funds have revealed how their precious metal was sourced from mining firms last year. The official exchanges are being cut off as a result. The divergence between physical and paper gold price is widening. See the Ashanti story as typical. Their CEO Mark Cutifani reports that funds are coming directly to them as mine producers, seeking metal supply for their investments. Major gold buyers are emerging from the Middle East and Asia. At the same times, new markets are flowering. New gold centers are forming, like in Hong Kong and Dubai. Vast increases in gold product exports are taking place from Japan. Some gold price arbitrage is at work also. The more attractive fair price paid in Shanghai reached $50 above the more controlled London price, a record price difference to encourage the international arbitrage. Chinese gold imports from Hong Kong hit a record high in October, up 50% from the previous month and up more than 40 times from October of last year. The divergence between physical and paper gold price is widening.
THE BIG SQUEEZE, THE BIG BYPASS
A major squeeze is on that capitalizes on the artificially low COMEX price and the higher honest physical price. A gold trader informed that some multi-$billion purchase Gold orders have been in the process of filling at or near the $1600 price per ounce. The price is forcibly being kept low so as to enable some significant completed deals ready at $1900 per ounce. They must clear. The true physical price is between $1900 and $2000 per ounce. Gold bars will change hands from certain loyal large banks to private hands in Asia. These banks are being pressured out of their gold, as they contend with deep insolvency, reserves requirements, falling sovereign bond values, depositors exiting, and more. The buyers are well funded and motivated. If the gold cartel insists on pushing the price down, then they open the door for major volume sales at the artificially low bargain price that will work to drain the COMEX. This is consistent with mining firms removing supply lines to the COMEX. Several months ago, the anonymous London trader offered some ripe information about the Chinese accumulating gold bullion from the major metals exchanges. He is back to offer an update. Credit again goes to King World News. The Chinese are removing bullion metal from both Exchange Traded Funds, the GLD and SLV. They will be gutted next year. Investors beware. Many large buyers are large Chinese sovereign wealth fund entities. The paper gold market based in futures contracts has diverged from the physical market. Credibility is being lost quickly. The divergence between physical and paper gold price is widening!!!
Jim Willie CB Editor of the “HAT TRICK LETTER”
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December 21, 2011