One Ounce per Person Please

One Ounce per Person Please

The fiat currency regime of the west is drawing to a close. On the day that people wake up to realize that the markets they have put their trust and the product of their labor in, are no more than complex and elaborate paper castles, they will run to the refuge of the only hard, tangible assets ever known to man.

In a move that is uncharacteristic of the metal in recent years, gold rose by a dramatic $8.50 in New York trading on Tuesday, a change of close to 3%. Gold’s rapid rise was accompanied by a 2.3% price rise in silver.

THE TWO DOLLAR RULE
For some years, observers have pointed to the fact that gold has been managed in a $2 daily trading limit, rarely allowed to break out of that range in a single trading session. The overwhelming evidence presented by GATA’s Bill Murphy and others, clearly document that gold rallies are met by heavy bullion bank selling. This makes today’s price rise even more significant.

MARKET SHORTS

Each day that passes, the stress in the precious metals markets grow. Both gold and silver suffer massive supply to demand deficits each year. These deficits have been met to a large degree by central bank leasing.

When a central bank take an asset (that they keep on their balance sheet as a current asset), then lease it out to a bullion bank, who in-turn sells that asset in the physical market, that practice can only be described as fraudulent. If I practiced this style of business I would wind up in jail. It is a practice that creates a real and physical short position. It is thought that the combined short positions created from this “Gold Carry Trade” now total an estimated 10,000 to 15,000 ton.

What happens when central banks want their bullion back? It is incredible to consider that at today’s levels of production, it will take somewhere between 4.5 and 7 years of new mine supply JUST to pay back the central bank gold that has been leased out and consumed at these ridiculously low prices, and that’s without 1 ounce been made available to meet future demand.

Many of today’s large gold producers have sold much of their future years production forward at locked in low prices.

MARKET STRESS

Cracks are appearing in the stressed and manipulated precious metals markets. This year, gold has maintained a steady upward trend, now up $20 dollars since January 9th. No bullion bank that has sold gold short at $275 oz wants the price to rise to $300, and will understandably pull out all stops to prevent the price rising further.

Similar market stresses are appearing in the silver market. In early January, silver lease rates suddenly and dramatically rose by 6000%, signaling tight supplies of lease-able silver.

The exponential growth in gold derivatives held on the books of bullion banks in recent years is absolutely outrageous. In the days post the Barings Bank, Long Term Capital Management and Enron fiascos, one would think that the dangers of derivatives would speak for themselves.

GATA have rightfully pointed out that the scandal brewing in the gold market is going to dwarf the Enron and Watergate scandals combined. After nearly 20 years of the precious metals languishing in no-mans land, very few realize the potential for these little understood markets to rise rapidly into the stratosphere.

The massive short positions that have built up in recent years cannot magically go away without immense upward pressure on prices in the future. Short covering rallies are the result of those who are short gold or silver, going into the market to buy metal (at any price) to deliver into their shorts positions. The higher prices go, the further short covering will take place, in-turn pushing prices to extreme levels very quickly. Then add to this, individual investors storming the markets to get in “at any price”.

EXTREME MARKET POTENTIAL
Everyday, many trillions of dollars are traded in the currency, bond and stock markets worldwide. By comparison, the total above ground stocks of gold, in their entirety, are valued at JUST 1.5 trillion dollars. The silver and gold bullion markets extremely small, not everyone can get into these markets at one time. When even a very small percentage of the trillions of dollars traded in the paper markets daily, try to flow across into the bullion markets, prices will go beyond ones wildest imagination.

When we say that the precious metals markets are small, it is sobering to learn that there are nearly 6 billion people on the face of the earth. In the entire history of the world, there has been an estimated 4 billion ounces of gold mined only. Doing the math, that’s LESS than one ounce per person alive today. Working on that assumption, if you or I own 10 ounces, that’s 9 people that, have missed out. It pays to remember that, of the 4 billion ounces above ground, much of those ounces are simply not available to the market at any price.

The fiat currency regime of the west is drawing to a close. On the day that people wake up to realize that the markets they have put their trust and the product of their labor in, are no more than complex and elaborate paper castles, they will run to the refuge of the only hard, tangible assets ever known to man. At less than an ounce of gold per person, there just isn’t enough to go around, regardless of price. It is not unreasonable to say that the day is coming when the paper price of gold will be increasing 20 – 30 – 50 – 100 dollars a day, day in day out, with silver not far behind. It could well pay to get in while you can.

by Philip Judge
2002