The phoney silver and gold markets, e.g., the London and New York exchanges, trade in multiples of paper in relationship the actual available physical metal. Today, a call to my local coin dealer shows that the market price is far too low. The Canadian PMX expects to have one ounce physical coins including silver American Eagles, Silver Rounds, Maple Leafs, Philharmonics, and bars; and 1 oz gold Maple Leafs, bars, and Philharmonics only by the middle of January. This means: (1) the mints can’t keep up with the investor demand because the current market price is too low; (2) no one who actually already owns physical species of precious metals in the Toronto area are bringing their coins to Canadian PMX to redeem them at these pathetically low market prices. Thus, those with physical metal know that they are holding value, while the current paper market in which traders pass back and forth many multiples of paper metal with little physical backing is an absolute farce.
I remember those who came from manipulated markets in the Soviet bloc countries during the cold war had severe supply demands. I heard a testimony once that people would stand in line at markets for a long time, not even knowing what was for sale. When you final came to the front of the line, they might be selling left shoes size ten, and you would buy them, as many as you could, because you never knew when you might have another chance to buy something.
Currently, the physical market is very tight. If buyers have a chance to put their hands on physical metal, they should. You never know the next time you’ll have a chance.
Disclosure: I currently have positions in Sprott Physical Gold Trust and Sprott Physical Silver Trust.
Gold mining companies may be good in the sense that their assets (NAV–Net Asset Value) are largely trapped under ground and brought to the surface at a slow rate and sold for profit; thus they will still be recovering value from the ground when money has collapsed and gold is needed as a currency. I think the same is true of Canadian oil companies, which have large stores of oil and gas in the ground (i.e., NPV–Net Potential Value)–the Cardium and Swan Hills are largely, e.g., are known quantities exploited by vertical drilling and are now offer new yield through new technologies, i.e., horizontal drilling and multi-fracking. Billions of barrels remain in the ground, and EOR (Enhanced Oil Recovery) methods, such as the injection of natural gas, that companies like Petrobakken (see this post) and Crescent Point are beginning to employ promises to produce as much as 25% more recoverable oil from the fields–this means that these companies could increase their NAV by as much as 5 times, since their current NAV is based on 5% recoverable oil. The US has a lot of oil too, but the Canadian regulatory environment remains for now a far more favourable than in the US. Yet this remains high risk, and my portfolio which consists most of these oil companies and few miners is suffering YTD.
Thus, the operative word in all this is risk. Nothing is safe. Perhaps the best thing is to focus on what is “real” as opposed to what is “safe”. Fiat money is not real, for our estimation of all that is denominated in nominal currency is actually a reification–the assigning of concrete value to an abstraction. What is real? Physical gold & silver, wine kits (see Wine as Currency), spam, beans, unused toilet paper, used aluminium beverage cans. What is reified? Bonds, derivatives, currencies, the value of gold in terms of fiat currency, etc. I have a canned spam collection, Monty Python not withstanding–mind you, I like spam. It has a long shelf life and is good food during times of crisis–that’s why my Korean family from Hawaii used to eat a lot of it–it could survive the sea journey from the mainland and was a staple during WWII.
According to Zero Hedge, Chavez run on physical gold may drain the banks of their physical assets, and thus result in a run on physical gold. This would result in a parabolic rise in the price of gold, and as I suggested in an earlier post, if all the paper gold were to turn into demands for physical gold, the value of the dollar could drop to 1/56,000 of an ounce of gold.
Last week, Zero Hedge mentioned that CME increased margin requirements for gold traders. This had an only temporary lowering effect on the price of gold; eventually, as margin requirements can be raised to the point that cash money will be able to buy gold or silver. But this will not prevent the run on physical gold, in my opinion.
There is a story going around that the London Bullion Market Association has sold as much as 45-100 times the amount of gold futures as there is physical gold underlying the notes. I first heard about this story from Monty Pelerin’s blog which featured a Max Keiser interview with Jim Willie (see videos below). Then, on the Peter Schiff Radio Show, Adrian Douglas claims that gold should be selling at $56,000 per ounce. Even Peter Schiff was incredulous about it (see http://www.schiffradio.com/pg/jsp/charts/audioMaster.jsp?dispid=301&pid=51169 ).
The futures markets are fractional reserve systems running at very low reserve ratios, something like 45 to 100 ounces of electronic gold and silver obligations for every unencumbered ounce of physical gold or silver. The day is coming when the physical price of gold and silver disconnect from the electronic price and they can not be brought back together again except through a massive devaluation of the dollar in terms of gold and silver. On this day the future’s markets in gold and silver will be stopped. There will be secret meetings. Those holding electronic gold tickets will be paid in be paid in dollars at the price of gold before the disconnect. And then I believe that there will be an explicit devaluation of the dollar with respect to gold on the order of 20 to 40 times.
Once this happens, the dollar will be further devalued against a large number of other commodities and will probably actually collapse altogether as the world’s reserve currency. Few believed the warnings about fraud which was going on in the real estate market and yet that bubble collapsed. Lying, manipulation and greed is the common story in our times. I’m preparing for this one. I am long on Barrick ABX, New Gold NGD, Lakeshore Gold LSG, and Detour Lake Gold DGC; and I’ve now also taken a long position on Sprott Physical Gold PHY.U, which claims to keep actual physical gold in the Canadian Royal Mint. I’ve sold puts on ABX, GG, DGC and NGD.
Here is Max Keisar interview Jim Willie in three parts: