Law of supply & demand is dead for gold & silver
By J. S. Kim
I’m going to preface this article by warning you that this is one of
the longest and most important articles I have scripted in many
months. During the recent gold and silver correction that began on
July 14, 2008 and which perfectly coincided with the miraculous
surge higher in the U.S. dollar, there was a massive story unfolding
that should have been a lead story in every financial magazine,
newspaper and website. Yet the media responded with silence. The
story was so big, as a matter of fact, that every economics textbook
should now have to remove the Law of Supply and Demand from their
pages because if free markets still exist, the recent behavior in
gold and silver markets strongly obliterates it.
Before I begin with that story, make no mistake that we have just
experienced a steep correction and not the end of the gold and
silver bull. Also make no mistake that this recent dollar rally is a
miraculous rally because fundamentally nothing has changed about the
U.S. dollar that could explain such a quick surge higher. In my last
post, though I described calling the bottom of the gold markets a
"sucker’s bet" that was a waste of time when markets are so
blatantly manipulated, I foolishly took the bet anyway and was wrong
about predicting the bottom (I’ve now learned my lesson about taking
a sucker’s bet when I know it is one! Still, my subscription members
well know my updated position about the short-term direction of gold
and silver markets since this last public posting). But on to the
meat of this article.
The Law of Supply & Demand is Broken: Demand Soars and Prices
Plummet!
Consider the following. As gold and silver prices started to plummet
on July 14th, surging physical demand for gold and silver continued
to lead gold and silver prices markedly lower. For the first time in
history, record demand in a commodity was helpless to stem
plummeting prices and in fact, contributed to further price
declines. In July, India bought 22 tonnes of gold. In August,
according to Reuters, India increased its gold purchases by more
than 350%, buying more than 100 tonnes of gold.
This figure also represented a 56% increase in purchases when
compared to purchases during the same month from a year prior. In
Dubai, demand surged as well.
“We are definitely witnessing a surge in demand for gold in Dubai
and physical shortages have been reported by many dealers,” said Ian
MacDonald, the Dubai Multi Commodity Center’s executive director for
gold and precious metals. “We are also seeing demand being driven by
currency concerns in the region as many investors perceive the
precious metal as one of the few strong currencies.”
Gold jewelry sales in Abu Dhabi soared 300 percent in volume and
almost 250 percent in value in August from a year earlier after the
metal dropped to nine-month lows, the emirate’s industry group said
on Monday.
“It was the best month the market has seen in almost 30 years and it
compensated for any drops we have seen earlier this year,” Abu Dhabi
Gold and Jewelry Group Chairman Tushar Patni told Reuters.“We had
never expected (emphasis mine) that if gold fell below $800 an ounce
we would see a 300 percent increase in volume and 250 percent in
value, especially as many buyers are abroad on holiday.”
In the United States, the stories were the same. Many gold and
silver bullion and coin dealers reported record sales in August and
shortages of supply. I could quote fifty other stories similar to
the ones above, but for the sake of brevity, I will not. Global
sales of gold and silver would have to be at record levels in August
for gold and silver prices to be pushed much higher for that month,
and all preliminary indications are that global sales in August for
gold and silver were indeed at record numbers. So how can it be that
record demand and sales in the physical gold and silver markets
would cause gold to plummet from a price of $910 an ounce at the
beginning of August to less than $750 an ounce, and silver to
plummet from a price of close to $18 an ounce at the beginning of
August all the way down to almost $10 an ounce?
When this inexplicable anomaly was pointed out (at least
inexplicable according to the supposedly irrefutable Law of Supply
and Demand), gold and silver analysts employed by Wall Street to
spread disresponded only to stories of shortages being
reported in the United States and did not address record sales of
physical gold in various countries in the Middle East and in Asia.
They responded to reported U.S. shortages of bullion and coins by
stating that dealers had supply but were simply not being honest
about their supply numbers because they did not want to sell any
more stock at such depressed prices. This certainly could have been
a very reasonable and logical explanation that adequately explains
some of the shortages that were reported by gold and silver dealers.
However, this was not “mystery solved” as these demagogues employed
by Wall Street claimed.
During this Correction, Gold & Silver Steady or Much Higher Many
Days in Asia, Down Markedly Lower by Close of New York Markets
How can record sales, the strongest in 30 years, and shrinking
supply in other regions of the world like the Middle East and India,
cause prices of gold and silver to plummet steeply as well? Clearly,
since price is a function of supply and demand, rising record demand
for gold in India and the Middle Eastern markets should have stopped
the downward slide in gold and silver markets dead in its tracks and
led the price higher again. And indeed this is exactly what
happened. But it happened only in the futures markets in Asia. Last
week MarketWatch reported a story that gold experienced one of its
worst months ever in this bull run because August had not one day
where gold closed higher in price; however, this article only told
half the story as the media so often does. Gold experienced many
days in August were it closed higher in Asia and significantly
higher, often piling on gains of $5 to $10 an ounce. These gains
were only lost once London markets closed and New York markets
opened; only then, were gains quickly sold off and then transformed
into deep losses within a span of 24 hours.
If one constructs the 24-hour gold and silver charts for every day
during this correction, one will discover an overwhelming amount of
days when gold and silver were significantly higher in futures
markets in Asia, but then were sold off harshly at nearly the exact
same time (within a 30 minute time frame) when London markets closed
and New York markets opened. How could this have happened? Simple.
The price for gold and silver that you see plastered all over
financial tickers everyday is established in the paper futures
markets and not in physical markets where REAL gold and silver
actually exchange hands. In the futures markets, only 1% of all
futures contracts are closed out with actual delivery of the
physical commodity. Instead 99% of all futures contracts are closed
out with the purchase of another paper contract. In the case of gold
and silver, futures contracts represent digital bytes of gold and
silver flying around in a paper market, not real ounces of gold and
silver that exist in the physical market. Thus it is entirely
possible to utilize this discrepancy to create two entirely
different prices for the same commodity. In other words, if not
properly regulated, futures markets provide a gateway to manufacture
massively fraudulent prices non-reflective of the buying and selling
volumes that are occurring in the physical markets!
Two Parallel Markets For Gold & Silver: Paper Markets & Future
Markets
Thus, the world can end up with two parallel markets that act
differently: a papers market for gold and silver and a physical
markets for gold and silver that establish significantly different
prices for the same commodity over short periods of time, odd as
this may seem (I say short periods of time because unless
perpetually manipulated, free markets will eventually work out such
massive distortions over time). The recent actions that were
coordinated in the futures markets for gold and silver beginning on
July 14th would most likely have been impossible to replicate in the
physical world of gold and silver. To any veteran investor in gold
and silver, the manufacturing of this correction was as plainly
transparent as a two-ton boulder falling out of a clear blue sky.
Though I won’t discuss the other mounds of evidence that explain how
this correction was manufactured, these other specifics deal with
large U.S. institutions that piled on huge short positions in the
futures markets for gold and silver in an incredibly compressed
period of time around July 15th.
Again, the gold and silver analysts paid by Wall Street to spread
misspoke out against the manipulation theories, simply
stating that the dollar was overdue for a bounce and gold and silver
markets were overdue for a correction. I have stated multiple times
myself over the years that bulls never rise straight higher and will
correct, and that bears never plummet straight downward and will
experience bear market rallies. This much is true. Still, what
transpired starting this past mid-July was far beyond the realm of a
free-market inspired U.S. dollar bear market rally and a free-market
induced gold and silver bull market correction. The meteoric rise of
the U.S. dollar since July 15th and the panic inducing slide in gold
and silver prices reeks of manipulation and not a natural
free-market rally and correction for many reasons.
For instance, try explaining this. I know for a fact that certain
gold coins that were selling in the low $700 range when the price of
gold bullion was at $680 an ounce a couple of years ago were still
being priced at more than $1,100 by gold coin dealers even when gold
slid all the way down to $750 an ounce during this current
correction. When I inquired as to why the prices of these gold coins
had not also slid to $780 or so (as would have been dictated by the
spot market price of gold), but were instead still selling for well
over $1,100 a coin, the dealers answered that demand, not the spot
price of gold in the futures market, was setting the prices of these
coins. Since demand was off the charts, the prices did not reflect
the monumental drops in price in the futures markets. When I checked
the market for silver coins, I discovered the same massive
disconnect between prices set in the physical markets for silver and
in the silver futures markets (that only comprise “paper” silver).
Silver coins were selling at prices sometimes 60% to 70% higher than
what would have been indicated by the spot price of silver
determined in the futures markets.
Last month it was clear that the Law of Supply and Demand was dead
for gold and silver markets. Soaring physical demand for gold and
silver were not factored at all into the prices set in the PAPER
gold and silver futures markets. Incredibly, soaring physical demand
created a greater acceleration of losses in the prices in the PAPER
gold and silver markets. One way to interpret this disconnect
between physical and paper gold and silver markets that clearly
happened last month is this: If a bushel of corn were selling in the
September futures market for $1.40, but if you were to go to a farm
in Anytown, USA and had to pay $3.10 for a bushel of corn, what
would you conclude was the REAL price of corn? This is how you can
determine the real price of silver and gold today. Look to the
physical markets, not the paper markets, for the real price of gold
and silver. Who cares what the paper futures markets are stating as
the spot price of silver, if I still have to pay 60% more than this
price when buying silver coins in the real world? The price is
simply what I have to pay for the real physical silver, period.
The Usual Suspects
The most likely culprits of this manipulation are all members of the
U.S. President’s Working Group on Financial Markets (the SEC, the
Commodities Futures Trading Commission, the U.S. Treasury, and the
U.S. Federal Reserve). A massive disconnect between the price of
gold and silver in physical markets and the price in paper futures
markets, of the extent that happened last month, either means that
the Law of Supply and Demand has just been proven to be invalid, or
that massive fraudulent manipulation just occurred. I will let you
make this conclusion. However, let me be clear that the evidence of
manipulation was so overwhelming this time that it was not just the
usual suspects, including yours truly, voicing these opinions. It
must have greatly dismayed the mainstream analysts that try to cover
up evidence of manipulation in commodity markets, particularly in
gold, silver, and oil, that a member of the mainstream investment
community attributed the recent gold and silver decline to
manipulation.
It also must have dismayed these same analysts that four U.S.
Senators who are key members of Congressional energy committees
recently stated that the Commodities Futures Trading Commission
"obviously knew that underlying data used to prepare the interim
report was seriously flawed." (emphasis mine) (The report referenced
by the Senators was a key report distributed to U.S. Congress days
before a legislative vote to close commodity trading loopholes that
allow massive manipulation of commodity markets. The report stated
supply and demand was solely responsible for the recent run up in
oil prices to $147 a barrel. The seriously flawed data that was
contained in the report, after it was corrected, demonstrated that
manipulation was responsible for the run up in oil prices. Based
upon the deliberately falsified data provided by the CFTC (the
Senator’s words, not mine), Congress voted to keep the loopholes
open. Read the whole story here).
Don Coxe, chairman and chief strategist of Harris Investment
Management in Chicago, one of the top respected investment groups in
the United States, called this recent manipulation of gold and
silver markets that broke the Law of Supply and Demand a "brilliant"
plan executed by the U.S. Federal Reserve and U.S. Treasury. My
reply to Mr. Coxe? Let’s not get carried away. If I was in charge of
the U.S. Treasury and could direct the CFTC, the SEC and various
Wall Street firms through the President’s Working Group on Financial
Markets, I could have pulled this plan off in my sleep. If the plan
was executed in the manner that Mr. Coxe speculates, there was
nothing brilliant about it. Let’s call the plan for what it was.
Fraud and a shameful dismantling of free markets and capitalism.
Plain and simple.
But in today’s world fraud is the name of the game. When the Law of
Supply and Demand was broken in the gold and silver markets in
August, for a comparable story of similar magnitude to exist in the
scientific world, the Law of Gravity would have to be disproven. If
it was reported that in California, a man ran down the street, threw
his hands in the air and flew for a length of 200 meters while 10
meters from the ground, don’t you think that reporters would be
scrambling to report this story? Yet gold and silver markets just
proved the Law of Supply and Demand to be no longer relevant in
August 2008, and ZERO members of the mainstream financial press
deemed this story to be newsworthy.
Fannie Mae (FNM) and Freddie Mac (FRE) committed fraud for years and
nearly triggered the collapse of the entire U.S. housing market.
When their bailouts finally became necessary, people that ingested
the force-fed spin that this bailout was “for their own good” and
don’t understand the implications, cheered the fraud that allowed
the Fannie Mae and Freddie Mac CEOs to retain their tens of millions
in salary and bonuses they collected from engineering this fraud.
Furthermore, for their roles as architects of this fraud, Freddie
Mac CEO Richard Syron and Fannie Mae CEO Daniel Mudd are to
respectively receive a severance payout of approximately $6.3
million and $7.3 million, respectively. When Stan O’Neal and Chuck
Prince were respectively ousted from Merrill Lynch (MER) and
Citigroup © for their terrible leadership and participation in
creating the most massive financial crisis the U.S. has seen in
decades, what were their rewards for leading investors of their
stock into financial ruin? A $160 million and a $40 million golden
parachute, respectively.
The reason this current story is so important is the following: The
very acceptance and nonchalant reactions to this fraud by billions
of people worldwide poses an equally serious threat to the health of
the U.S. and global economy as the actual perpetrators of these
fraudulent actions. Though I’ve never asked any of my readers to
take action before, I urge you this time to email the link to this
article at my investment blog, theUndergroundInvestor, to every
single person that you know that has ever had so much as a ruble, a
dollar, a peso, a real, a Swiss franc, a Euro or a pound invested in
stock markets. Knowledge is power, and only knowledgeable persons
can prevent these same shenanigans from happening in the future. As
this financial crisis deepens and we have only seen the very
beginning of it, the intensity of discampaigns will
increase at an exponential rate. To solve the crisis will require
aware and knowledgeable investors, and masses of them. Thus, we must
begin spreading awareness today and not a day later.
The Likely End Game: Re-Capitalization of the U.S. Financial Sector
at the Expense of the Individual Investor
I’ll conclude this article with my theory of why this manipulative
scheme was executed in the gold and silver markets, for I have not
seen another analyst give any credence to this theory as of today’s
date. This sell-off in gold and silver and the U.S. dollar rally
wasn’t engineered just to stem the record rate at which foreign
central banks were dumping U.S. Treasuries (another huge story that
somehow the entire mainstream financial press somehow missed).
Furthermore, this scheme wasn’t hatched solely because it was a
necessary step to save the global financial markets as Don Coxe
speculated. Both are fine reasons, but ultimately, unlikely to fully
explain why this scheme was hatched in July. With the failure of
Fannie Mae and Freddie Mac, the failure of Merrill Lynch (just
announced Monday), the likely failure of Lehman Brothers (LEH), and
the likely failure of a huge U.S. financial institution on the
imminent horizon, all these failures are about to place a serious
squeeze on the already hemorrhaging balance sheets of some of the
world’s largest financial institutions. With foreign interest in
increasing ownership in these institutions quickly dissipating and
weak share prices unable to translate secondary offerings of stock
into significant amounts of capital, some of the largest financial
institutions were absolutely desperate to find a channel in which to
raise significant amounts of capital (not hundreds of millions, but
billions of dollars) very, very quickly. What just happened in the
gold, silver and oil markets accomplished this goal, and thus may
have been integral in preventing a global financial collapse.
Let me explain. During this recent gold and silver correction, gold
and silver markets were higher, and significantly higher in Asia
before drastically turning significantly lower in New York almost on
a daily basis. The creation of these huge arbitrage opportunities
could have been exploited by large financial institutions to reap
billions in profits in an incredibly condensed period of time. The
type of arbitrage opportunities that existed during this recent
correction in gold and silver was absolutely enormous. Unprecedented
2% to 5% swings in the price of gold and silver bullion from their
highs in Asian markets to their lows in New York markets happened
time and time and time and time and time and time and time again
during this recent correction (if you were unaware of this action or
don’t believe me, simply search out the 24-hour charts for gold and
silver for the entire month of August and you will be absolutely
dumbfounded from what you will discover). These swings in prices
were so enormous that daily swing trades in futures markets, given
these arbitrage opportunities, could have produced hundreds of
millions of dollars of profit in a single 24-hour trading day.
During the past few weeks, these arbitrage opportunities may have
produced profits in the tens of billions of dollars, if not more,
for just a small handful of firms.
If I were a large financial institution with a critically
hemorrhaging balance sheet due to massive losses created from insane
foolish and risky bets on MBS (mortgage backed securities) and CDOs
(collateralized debt obligations), and I wanted the quickest way to
recapitalize my balance sheet, how would I do it? Through gross
manipulation of commodity markets, in particular the gold, silver,
oil and agriculture markets. Of course, I would need the help of
certain regulatory agencies to achieve this and wouldn’t be able to
accomplish this on my own, but I’m going to speculate that this is
exactly what just happened. This correction was not only just about
shoring up the U.S. dollar and U.S. Treasuries, but also about
recapitalizing Wall Street and huge banking institutions. Though I
haven’t covered the oil and agriculture futures markets, there is
more than ample evidence that the same thing has occurred in these
markets as of late as well (and again, the evidence is blatant enough
that U.S. Senators have demanded investigations into much of the
curious behavior I have delineated in this article). Again, if you
are someone interested in putting an end to the regulatory and
government schemes that continue to reward CEOs for their
incompetence, dishonesty, and disloyalty to shareholders, and you
care about the future of the United States, I urge you to forward
this article to everyone you know.