Here’s why gold is a “tinderbox of price explosion waiting to be ignited”

strike match gold priceLast year was a perfect example of one of “paper” gold’s largest failings: It leaves the entire gold market vulnerable price manipulation and unnatural volatility. There is no question that 2013 wasn’t the best of years for gold, with its drop in price shaking some confidence in it as a safe haven. But here’s the truth: Global demand for gold in 2013 was still so incredibly strong that if it weren’t for “paper” gold products on Comex and ETFs, prices likely would have risen.

Gold as a paper product is problematic to begin with. The highest and best use of gold and other precious metals is as a store of wealth in the face of withering inflation. To get that benefit, you must own the actual physical asset. The appeal of an exchange traded fund is understandable on the surface, but look a little closer and you can understand why gold ETFs do much more harm than good.

An ETF is a security that tracks the value of an asset (or asset class), and which you own and trade like a stock. For gold and precious metals, it has meant that you can take quick advantage of price fluctuations without having to wait for delivery or worry about storage. We understand that this seems more convenient, but 2013 is case in point why cutting corners in such a way has been penny wise and pound foolish.

Throughout 2013, as gold ETFs were sold off en masse, a colossal 880.8 tonnes of physical gold was released onto the markets by these funds. Three-quarters of that gold was easily gobbled up by consumer demand, especially in China, India and the Middle East. The extra quarter, however, constitutes the oversupply and dip in price. (India’s surge in demand is especially interesting because it’s in spite of the barriers to imports that the Indian government has put in place.)

ETFs are not the only problem, however, or even the biggest problem. Paul Craig Roberts explains in detail here how the Federal Reserve uses paper gold on the Comex market to manipulate the price of gold. He reveals how the Fed times the dumping of futures in order to cause the price of gold to plunge and spook investors. But a key factor here is that the demand for physical gold is so high that these dips unleash a flood of buyers – mostly in China and India – which makes these expensive machinations less effective than they otherwise would be. It is VERY important to note that these manipulations have a hard limit. They cannot be sustained forever, or even for very much longer.

The mind boggling thing is that there are multiples more of paper gold “claims” than the physical gold in existence. This is a veritable tinderbox of price explosion just waiting to be ignited.

And now, as we head into 2014, there are signs that a match may be approaching that tinderbox. Consider:

What has it meant for precious metals? Well, the market has been buying because it’s clear that last year’s dip in price won’t last. While it appears as though the dips are caused by manipulation from the paper markets (and thus quite artificial), the peaks are very much based in reality.

And wouldn’t you know it: Gold has been soaring, now up in price 8 of the last 9 weeks. And silver? It has posted its longest rally in… GET THIS… 45 years! Prices are moving up – with that match approaching the tinderbox ever more closely by the day – but there’s still time to get in at what we consider to be relatively low prices. If you’ve been on the sidelines, now is the time to act. Give us a call. Or just click here to request your no-cost, no-obligation investment kit. Years from now, we’re confident that you’ll be glad you did.

Precious metals on the move

London Fix PM price at week’s end, and change over previous Friday:

  • Gold: $1,323.25, up 0.2%
  • Silver: $21.74, up 3.1%
  • Platinum: $1,422.50, down 0.2%
  • Palladium: $739.00, down 0.1%

In the news

“So these anti-gold idiots are just that, idiots, or else they have the memory of a goldfish, because currencies come and currencies go, as sure as night follows day. It is the natural order of things. And as you can see, it’s not about trading gold to get rich or getting long gold or buying one by two call spreads or getting fancy, it literally is about protecting yourself in the end. It’s not like [Grant] Williams got rich. He just stayed rich. Everyone else got poor.” – Jared Dillian on Grant Williams, a portfolio and strategy advisor to Vulpes Investment Management in Singapore (link)

This is the main reason why gold prices have “shot up” so far in 2014
“Bullion traders never knew before what would happen to prices if China hit trouble because we’ve never before seen Chinese demand plumbed into the world market so deeply. Its jewellery buyers, together with rising mining costs worldwide, helped finally put a floor under gold in 2013. But while that kind of consumer demand will never drive prices higher, capital flight by wealthier households and Chinese money managers certainly can.” – Adrian Ash (link)

2013 saw an “unprecedented flow” of gold from west to east
“No review of 2013 would be complete without a mention of the unprecedented flow of gold from western vaults to eastern markets, via refiners in North America, Switzerland, and Dubai. These shifts resulted in the shipment and transformation – on an epic scale – of 400oz London Good Delivery (LGD) bars into smaller denominations more suitable for consumers’ pockets.” – World Gold Council (link)

What can the United States do about the money owed to China?
“All we have to do is inflate our currency and pay them back in cheaper dollars and that reflects a wealth transfer from China to the United States. So China is completely vulnerable to that, which is why they are buying gold to create a hedge. If we inflate, then gold will go up. So what they lose on the paper, they make on the gold.” – Jim Rickards (link)

You know gold is REALLY moving when the big banks (finally) come back on board…
“Gold has started to shed its stigma, if slowly. Over the past thirteen months gold was either the favorite asset to short or to ignore completely. Recent developments, however, suggest that this is no longer the case, and momentum is returning… [There’s a] positive sentiment shift taking place amongst U.S. investors towards gold… This marks quite a sea-change in attitude and, in turn, a sizeable potential boost for the metal.” – Edel Tully and Joni Teves, UBS (link)

Chart of the week

More proof that China is fleeing the dollar (and getting into gold)
In December, China sold off the second largest amount of US Treasury’s ever – $48 billion in paper!
china us treasury holdings december 2013

adrian ash, china, Featured, gold, india, silver, world gold council