Political Metals

Submitted by: Adrian Ash | BullionVault

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Plenty of reasons to be cautious were flagged up in today’s “Bubble or Not?” debate… LOTS MORE to share from the second and last day of this year’s LBMA Annual Conference here in Montreal. But the red-eye for London won’t wait, not with Air Canada cabin staff starting a strike at midnight.

So two quick charts, both highlighted by Edel Tully, precious metals strategist at UBS, in her conference summary. First, she said she’s adding this chart – hoisted from this morning’s opening presentation by Albert Cheng of the World Gold Council in the China & India session – to her slide deck:

It shows the yawning supply-demand gap inside China’s domestic gold market. Now the world No.1 for gold mining output four years running, China cannot satisfy its own private household demand.

Bigger picture, the chart makes a neat pairing with this slide, used by Franco-Nevada chairman Pierre Lassonde in Monday’s keynote speech – and already a key fixture in any analyst or strategist’s PowerPoint slides, according to Tully.

Plenty of reasons to be cautious on gold were flagged by this afternoon’s “Bubble or not?” debate. In particular, the risk of a parabolic rise – similar to how silver shot higher this spring – could see “safe haven” buyers scared off by volatility. (Silver investment flows have certainly turned “hesitant” since then, noted GFMS’s Philip Newman.)

Or maybe existing investors will soon begin tiring of year-on-year gains in gold, and start rotating into other asset classes instead of waiting for what they might forecast as a “top”. Or maybe a blow-up in China – sparked by its own domestic credit and real estate markets, if not central-bank action to try and cool them, along with inflation – could see its tug on the world’s gold supplies pushed the other way, as the feel-good affinity for gold is reversed by economic slowdown or even recession.

But for now, as one panellist put it in the Oxford-style debate – and with gold investment accounting for just 1% of the world’s financial assets today – “This looks less like a bubble than an opportunity.”

 

Related News:

• Gold forecast to beat $2,000 in the next year

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Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

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David Morgan hosts a call on Saturday, May14th about silver that will be shocking to most! Guest included, Eric Sprott, Bill Murphy, Rob Kirby, Bob Quartermain, Sean SGTReport and James Anderson in for Mike Maloney.

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On the other side of the Silver Divide, here is an extremely well referenced (and very long) essay taking the opposite side of the Silver Story

http://fofoa.blogspot.com/2011/05/costatas-silver-open-forum.html

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And.. here’s a Bloomberg Interview with Jeffrey Christian who obviously takes the opposite side to the 7 “Giants” above

Jeffrey Christian, founder CPM Group predicts Silver $26, Gold $1400 by year end

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So, having heard from both sides of the Silver Divide, What’s YOUR take?

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While sales of gold coins at the US Mint are on track for the best month in a year amid the worst commodities rout since 2008, the same pent up demand for physical bullion is observed at the dealers’ level, as revealed by Jeff Clark’s interview with Andy Schectman of Miles Franklin.

By Jeff Clark | BIG GOLD

Jeff Clark: Andy, tell us about your industry contacts and how you get the information you’re privy to.

Andy Schectman: We source our product from three of the largest six primary U.S. mint distributors. Having 20 years of experience with these sources, as well as the dealers in the secondary market, we’re as tied into the industry as anyone.

Jeff: You made some interesting comments to me about supply and premiums. Tell us what you’re hearing and seeing in the bullion market right now.

Andy: I feel as though I’m the boy who cries wolf, or that I’ve been beating the same drum for too long. But in reality, it has been my feeling since late 2007 that ultimately this market will be defined less by the price going parabolic – which I think ultimately will happen – and more by a lack of supply. You see occasional reports that state it’s just a lack of refined silver or lack of silver in investable form. But as far as I’m concerned, there is a major supply deficit issue, and it’s getting worse.

Take the U.S. Mint, for example. Right now, as we talk, you can barely get Silver Eagles. We’re seeing delivery delays of three to four weeks, and premium hikes of a dollar or more in the last three weeks. Most of the suppliers in the country are reluctant to take large orders on Silver Eagles because they don’t know (a) when they’ll get them, and (b) what the premiums will be when they arrive.

I was talking to the head of Prudential Bache and asked him about Silver Eagles. He said, “You know, as soon as the allocations come in, they’re sold out. We can’t keep them in.” This is coming from one of the largest distributors of U.S. Mint products in the country.

And this is all occurring in an environment that has only minimal participation by the masses. Few people in this country have ever even held a gold or silver coin. So, if it’s this difficult to get bullion now, what’s it going to be like when it becomes evident to the masses they need to buy? This is what keeps me up at night.

Jeff: Some analysts say it’s a bottleneck issue, that the mints have enough stock but just need more time or more workers to fabricate the metal into the bars and coins customers want.

Andy: No, I don’t believe that. What business do you know that if they had that much profit potential wouldn’t increase production and hire more workers to meet demand? To me, the “inefficient model” argument is an excuse.

Look at what the U.S. Mint alone has done: they haven’t made the Platinum Eagle since 2008. They make maybe one-tenth as many gold Buffalos as they do Gold Eagles. They’ve made hardly any fractional-ounce Gold Eagles. Heck, they can’t even keep up with the demand for the products they do offer. Does that sound like a bottleneck to you? Or is it because there is far more demand than there is available supply? It’s pretty clear to me it’s the latter.

Jeff: What are you seeing in the secondary market? Are investors selling bullion?

Andy: There is no secondary market. Absolutely none. Nobody is selling back anything, at least not to us. Think about that: if this was a traditional investment and your portfolio went up 100% in the last year, like silver has, you’d think some investors would take some profits and ride the rest out – but nobody’s selling anything.

This is why I think the lack of supply is the single biggest issue in this market. And in time, I think it will become much more obvious. [Ed. note: We’re using the term “secondary market” in this instance to mean sellers of bullion and not the scrap market.]

There are only five major mints – U.S., Canada, South Africa, Austria, and Australia. Yes, there is a Chinese mint and a couple Swiss mints and some private refiners, but they amount to very little in the overall scheme of things. We’re in a situation where the mints are limiting the selection and raising the premiums, and this is occurring at a time when most people own no bullion. As it becomes more apparent that people want bullion instead of paper dollars, I think you’ll see premiums go parabolic and supply get even tighter.

Jeff: Are you getting a lot of new buyers to the bullion market?

Andy: More than ever. One of the interesting things we’re seeing is a lot of younger people dipping a toe in the water, buying little bits of silver here and there. We’re also seeing bigger orders, as well as more frequent phone calls from financial advisers asking us if we can help their clients. So yes, the base is broadening.

Jeff: That’s very interesting. So are you seeing more demand for gold or silver right now?

Andy: 90% of the new business is in silver. And I think that’s indicative of the state of the economy. People are trying to get into precious metals, but they think gold is too high. I think they’re buying silver because they realize the fundamentals for owning gold also apply to silver. They think the profit potential is better in silver, too. This has actually made the supply for gold better than it is for silver right now, and a lot of that has to do with price.

Jeff: Why are premiums fluctuating so frequently?

Andy: Premiums are almost impossible to gauge right now. Because the availability of product is getting smaller and smaller and the demand is getting stronger and stronger, premiums are changing literally overnight. And it doesn’t take many large investors around the country to force premiums higher.

The net of this is that it’s really hard for us to be able to say what the premium for a specific product will be two weeks out.

Jeff: You mentioned increased interest from fund managers. Tell us the kind of comments you’re hearing and why they’re buying bullion.

Andy: I think it’s coming from their clients. It’s my impression that people are taking it upon themselves to study a little bit more – to be more accountable for their assets – and I think they’re telling their financial advisors to buy gold. And in some cases it’s because they don’t want a paper derivative.

It’s no secret that financial advisors don’t like gold and silver. Once money goes to a bullion dealer, it’s not coming back to a stock portfolio any time soon, so they discredit it. But now it’s my impression they’re being asked by their clients to buy it. So it’s not necessarily because the financial advisor wants gold as much as it is the client requesting it.

Here’s a good example. There’s a firm here in Minneapolis that represents the Pillsbury fortune, and they asked me to talk to their partners about precious metals a few months ago. At the end of the conversation they said, “Okay, we’re going to place an order for one of our clients.” Upon hearing it was for one client, I thought it would be in the range of $50,000 to $100,000. Well, the order was for $5 million.

There are two astonishing things about this. First, that’s twice as big as the largest order I’ve ever had. It was one order, for one client, who’s brand new to the market. How many more potential buyers are out there like that? Second, they made it abundantly clear to me that it was out of pressure from one of their clients that they sought me out. So clients are increasingly demanding bullion, regardless of what their financial advisers say.

Jeff: Hearing about all this new buying might make some think we’re near a top in the market. Could that be the case?

Andy: No, no [chuckles]. I think Richard Russell says it best: “Bull markets die of exhaustion and over-participation.” Well, we’re nowhere near that point when so few people in this country own gold and silver. Heck, I’m a bullion dealer, and most of my peers don’t own any gold and silver! Yes, you’re seeing more commercials, but there are just as many commercials to buy gold as there are to sell it. I think that’s an indication this market is not exhausted.

Remember that in the year 2000 everyone and his brother had some NASDAQ shares. That’s an example of an exhausted or over-participated market. We’re nowhere near that.

Jeff: Where are the best premiums for silver?

Andy: The very best buy in silver right now is junk silver. And by the way, I think the term “junk” is unfair. It isn’t junk any more. It used to be junk in the ‘90s when silver was three or four bucks an ounce and it was sold basically at melt value and carried no premium. So I’d call it “90% dimes and quarters.” Anyway, junk silver has the lowest premium right now and, in my opinion, offers the best upside potential.

Next would be 10- and 100-ounce silver bars. And then one-ounce silver coins – but the Eagles are very expensive at the moment, if you can get them. The Austrian Philharmonic has the best value in a one-ounce silver coin right now, and they’re available. But again, premiums for all silver coins are escalating.

Jeff: What about gold?

Andy: Gold is not as bad. In fact, I would say that gold availability is decent right now for one-ounce coins and bars. There isn’t much available in fractionals. And Buffalos are still kind of hard to get. Other than that, the one-ounce coins with decent availability are Canadian Maple Leafs, Australian Kangaroos, and Krugerrands. And they all have decent premiums.

Jeff: So the take-away message is what?

Andy: First, I think you said it best with your recommendation to “accumulate.” Not only will it smooth out the volatility in price and premiums you pay, it will also give you a bird in the hand. If I’m right about this market, and I really believe I am, it will be defined by lack of availability of refined product. To combat that, just accumulate month in and month out, and be thankful when you’re able to get what you want.

Second, it’s about the number of ounces you own. You want to get as many ounces as you can without being penny wise and pound foolish. Stick with the most recognized products – don’t buy 1,000-ounce bars, for example, because they’re illiquid. You want to maximize your liquidity, and you do that by buying the most common forms of bullion – one-ounce coins, bars, and rounds; 10- and 100-ounce products; and junk silver.

Last, keep in mind that premium and commission are two different animals. Commission is what the dealers make on top of the premium. Premium is what the industry bears. So if the U.S. Mint is selling Silver Eagles for $3 over spot to the distributors, that’s before they’re marked up to the public. So even though the “premium” is high, you’re actually going to get most of that back when you sell. [Ed note: It’s not uncommon for the buyer to recapture most of the premium when they sell, particularly during periods of high demand.]

So, buy gold and silver while it’s available, even if you don’t buy it from me, because if I’m right, getting it at all could soon be your biggest challenge.

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Read More >>

Some key points raised by Eric Sprott, CEO and Chief Investment Officer of Sprott Asset Management in this May 16 interview with Max Keiser.

• Silver-Best recommendation anyone can make this decade
• Investment dollars going into silver is same or greater than that going into gold, which is trading at a 40:1 ratio. “I can’t see the price ratio staying in this range.”
• On silver’s recent parabolic move: “it’s going to be way more parabolic than we have today”
• Last week’s decline was premeditated, orchestrated
• Recent silver “Raid” was more to get the Shorts off the hook than to reduce the speculation of the Longs

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I am not talking about the specifics, about which individual holder of bullion changed the status of a very large portion of the remaining registered silver inventory at the Comex, and what their particular motivation might have been. I imagine that the details of that transaction and its short term intent will become known at some point. I am not even sure yet whether it is bullish or bearish. It could be part of a short term trading gambit tied in with the coming option expiration. I wanted to step back and get the significance of this in the ‘big picture.’ So I looked at the interactive Comex silver inventory chart over at 24hourgold to see what the big withdrawal from the registered ounces looked like in context. The chart goes back to middle 2008.

Several things stand out for me. First, there are definitely big declines in the past, certainly on the order of the most recent decline this week.

There is one significant difference. Two of the biggest declines occurred at year end, and are indicated on this chart as circles.

There are another two large declines in inventory comparable to this week in April time frames, marked on the chart by rectangles.

So its just a normal thing, right?

Not really. The prior two declines in April occurred after significant builds in inventory from the first of the year. This year that simply did not happen.  There was no bounce.

For me the most significant aspect of the chart is the steady decline in inventory over the past three years, stepwise at times, but getting dangerously low compared to the open interest in the futures market which that inventory supports which continues to increase. That is known in the trade as ‘leverage.’

I am sure that the exchange principals will pass along rumours about a short squeeze and an attempted market corner, and try to paint this as some insidious anomaly. Yes there are speculators becoming involved, those who see what is happening. As the British government attempted to hold the pound to an artificial value, and was hammered down by traders, famously George Soros but primarily the faceless acting through the Swiss, so too the metals manipulation by the Anglo-American banking cartel is staggered, and is probably going to go down hard, capitulate with a revaluation and partial disclosure, and move on from there. I think the episode of cheap gold and silver is over, until a new cycle of money begins.

I prefer to view it as the natural outcome of a long term manipulated market, in which artificial shortages have been introduced by protracted interference. If you artificially depress the price of most things for a long enough period, in a market based system you will introduce underinvestment and systemic shortfalls that will only be corrected by either higher prices and investment in production, sometimes with long lead times, and/or with ‘rationing’ either overtly, or through public relations campaigns that seek to discourage demand from a group of the people while other segments take the remaining supply.

They keep warning about bubbles, and silver ‘correcting.’ Well, the establishment pundits have no credibility on noticing bubbles, that is for certain. Their hypocrisy knows no bounds.

And what this trend seems to be implying is that silver is already correcting, higher, back to its real long term trend after decades of under performance due to artificial constructions and leverage.

Not too long ago, when gold made an all-time high or when silver made a new multi-decade high, there was much jubilation and noise amongst the gold and silver bugs, especially in cyberspace. Over the last few weeks, this has occurred so frequently that it has almost been taken for granted that gold and silver price records will keep breaking.

Today is one of those days. Gold briefly touched $1,500 and silver touched $44.15  intraday. Silver has gained almost 50% against the USD since January. One of the key drivers (besides the JP Morgan short position) of this rapid rise is the fact that silver is in backwardation since January. A backwardation happens when spot prices are higher than future prices. [Watch the video clip at the bottom of this page for a tutorial on Backwardation & Contango].

Looking at the gold futures chart above, you’ll notice that contracts to deliver gold in more distant years (up to 2016) are progressively higher than the current spot price of just under $1,500. The situation is glaringly different and directly the opposite for the silver futures chart below. 

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Backwardation very seldom arises in money commodities like gold or silver. In the early 1980s, there was a one-day backwardation in silver while some metal was physically moved from COMEX to CBOT warehouses. Gold has historically been positive (in Contango) with exception for momentary backwardations (hours) since gold futures started trading on the Winnipeg Commodity Exchange in 1972.  Wikipedia

The current unprecedented prolonged backwardation lasting months instead of hours or days is a sign of acute supply shortage in the silver physical market, and is a very bullish sign. Too much paper silver (eg. futures contracts, SLV ETFs  & other silver derivatives) are being sold such that when buyers of paper contracts decide to “take delivery” of the metal, the sellers are in a bind to find physical silver for delivery, thereby further pushing up spot prices. This mistrust and exit from paper silver (and gold) gained global attention when the University of Texas Investment Management Co., the second-largest U.S. academic endowment, recently took delivery of almost $1 billion in gold bullion.

If you are in paper gold or silver, consider converting some if not all to physical.  Remember, in a crisis, any paper (or electronic) representation of anything maybe worth only the paper it’s printed on.

For more information, see How to buy & store PMs.

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Tutorial on Backwardation & Contango in Futures Market. By InformedTrades