When central banks embarked on their course of zero interest rates and quantitative easing programs five years ago, the biggest threat to their schemes was if the public ever lost confidence in their power to devalue their currencies. And the one key financial element that would be the catalyst for destroying that confidence was the gold price.
So to ensure that central banks could perpetually continue a money printing ponzi scheme, they had to also embark on a program of gold price suppression. And they did this with a two-fold process.
1. Lease (sell) gold on the markets to help suppress prices.
2. Naked short the futures market (which currently determines the daily price) with hundreds of thousands of contracts.
The result of course is that it created a lack of confidence in the gold markets, because buyers were less willing to invest in this commodity/money if they knew that prices would be manipulated downward in a concerted effort by the Comex, the bullion banks, the Fed, and the regulators.
But as with all ponzi schemes, it only takes one slip up to blow the whole thing wide open. And with a growing understanding that the banks have little or no gold at all to backstop what is a $200 billion per day paper market, the clock is ticking on a massive time bomb that only needs a small push to blow the scheme wide open, and free gold to fair price discoveries once and for all.
Intuitively, we think that central banks might have lent/leased gold to maintain the status quo and mask what is technically a default. However, rather than being used to provide temporary liquidity, it is possible that loans/leases are being rolled. This is not sustainable and implies dual ownership claims.
Going forward, the market is vulnerable to several trends in physical gold trading patterns:
- Since 2009, central banks have switched from net sellers to net buyers ;
- The extraordinary strength in Chinese gold demand as indicated by withdrawals of bul-lion on the Shanghai Gold Exchange, e.g. an astonishing 2,597 tonnes, or more than 80% of all of the gold mined worldwide, in 2015;
- The rebound in gold held by London-based gold ETFs, which has been increasing since January 2016, as western investors dip their toes back into physical gold; and
But the vulnerability is not confined to current trends in physical bullion.
- Net gold exports by the UK – mainly to support strong Asian (especially Chinese) demand - which have been a feature of the market since 2013.
If there is no gold float, there is nothing supporting more than US$200 Billion of trading every day in unallocated (paper) gold instruments which accounts for more than 95% of gold trading in London.
The convention of trading unallocated gold has been based on a fractional reserve system. It works as long as gold buyers retain confidence that the banks could deliver physical gold if demanded, but our analysis suggests that they could not.For more than four years, selling of paper gold overwhelmed growing demand for physical gold from the likes of China and central banks (in aggregate). The “gold market” became a chimera as fundamentals were turned upside down. Banks added paper “gold supply” in almost elastic fashion on occasions when western investors increased net gold exposure via paper gold instruments.
We’ve argued for many years that a breakdown and bifurcation in the gold market between physical and paper gold substitutes would be necessary for accurate price discovery of physical gold bullion. The lead article in the January 2016 edition of the LBMA’s quarterly magazine was titled “Wholesale Physical Markets are Broken”, which might be confirmation that this process is reaching an advanced stage. - Zerohedge