“Help your enemies underestimate your capabilities”. This is what Sun Tzu, the Chinese general, wrote in the famous military strategy book The Art of War.
This military strategy is perfectly applicable today to the gold market. The Western press and pundits for the current financial status quo are doing all they can to divert investors from physical gold and make them underestimate gold (this only works in Western nations and not at a Central Banks level since they all own physical gold and are net buyer for a few years).
Two tactics are being used to implement that strategy: Publishing articles where the explosion of global physical demand is never mentioned and direct manipulation of precious metals spot prices by financial engineering, notably on the COMEX, through massive selloffs of futures at the most illiquid times of the market.
This article from the french newspaper Le Figaro titled “Les cours de l’or poursuivent leur dégringolade”, meaning that the gold price keeps tumbling is a fine example of the media fog intended to blur the vision of investors : no reference to the the huge physical demand.
The result of that strategy that has been in place for several years is that the spot (paper) price of precious metals is now below the cost of production, which is an aberration in a context of exploding global demand (cost of extracting 1oz of silver: $16.50), and that investors’ sentiment is at its lowest.
Let’s clear some of that disinformation fog by stating a few recent events and by asking a very simple question of economics logic:
- The law of supply and demand, which helps determine the price of an asset, makes it impossible for the price of an asset to decline in a context of strong demand. Everyone can understand this concept.
How can economists and “specialised” financial journalists talk about the price decline in precious metals with such aplomb, while global demand for physical gold and silver has literally exploded these last few years?
How can they explain this distortion in the law of supply and demand? This manipulation of physical reality?
Here are a few recent proofs of the explosion of global physical demand:
- The U.S. Mint has stopped the production of its flagship Silver Eagles. Though this halt is temporary, it could not happen if demand for physical silver wasn’t “enormous”. Legally, the U.S. Mint has to supply as many silver coins as it can produce, and it cannot ration its production if it has the capacity to produce coins and that demand requires it. So, let’s again ask the question: How can the spot price of silver be so low while the U.S. Mint is announcing a production halt due to problems with silver supply?
Can the actual price determination mechanism process be considered credible in this context?
- As the silver price was declining in October, and before the U.S. Mint announced it was running out of silver, investors bought 1.4 million Silver Eagles in two days.
- 2014 is on the way to become a record-setting year for sales of Silver Eagles, due to order volumes. Demand is not only “strong”, it is historically high. Once again, how can strong demand combined with a diminishing supply translate into low prices?
- Russia, which already had the world’s fifth largest gold reserves, bought more physical gold this year than it did since the last crisis of 1998. Russia bought 37.2 tonnes of physical gold in September 2014. In twenty years, Russia had never owned as much physical gold.
How can precious metals prices decline in this context?
I don’t even have to mention record imports from China or India in order to prove that global physical demand for gold and silver is “enormous”, especially coming from Asia.
One does not need to be a financial expert to understand that something is awry in the determination of the price of precious metals. And this has been going on for several years, but tensions on the physical markets were not as apparent as they are now.
I have often stated my point of view regarding the reason of the decline in spot prices: Manipulation. And Chris Powell, from the Gold Anti-Trust Action Committee (GATA), does a wonderful job of explaining this mechanism in this video:
Up to this day (Wednesday November 12, 2014), not a single bank had been accused of precious metals benchmarks manipulation.
It sure has been a long wait, but FINMA (Swiss regulating authority), has accused UBS of manipulation and fraud on the precious metals markets.
We now have official accusation of precious metal market manipulation.
The point I wanted to stress in this article in a comprehensive manner is that strong physical demand is not compatible with the decline of an asset price. I think everyone can understand that.
The price decline of these last few years is due to manipulation. BAFIN (German financial authority) mentioned it in the past and now FINMA (Swiss financial market regulators) confirms it officially.
The spot prices of gold and silver do not represent the real value of the physical metals.
Gold and silver investors in the West are stuck in the middle of a media/psychological war, but the events I stated above should reassure them regarding the absurdity of the precious metals price fixing mechanism.
One has thus to be patient and wait for the physical market to come back to its role of main price determinant.
Which event could trigger this evolution?
Answer : The end of manipulation will be triggered by an event on the physical market which will reveal that physical gold (or silver) is everything but “physically” available in quantities proclaimed
such as :
- A publicised delivery default on a "gold" paper contract that will prove that there is much more paper gold/silver in circulation than there are physical quantities available.
- An announcement by China of the exact amount of its physical gold reserves followed by a request from China for the United States to prove its own physical gold reserves.
- A YES vote on the Swiss Referendum on gold to be held November 30, since it would force the Swiss National Bank to buy physical gold directly on the markets (20% of its foreign exchange reserves) and, above all, to repatriate its gold, when we know that Germany only recuperated a very small amount of its gold stored in the USA, in London and in France. In other words – and this relates to my first point – repatriation/delivery default of physical gold.
And last, but not least, here is a last indicator coming from a former US Fed chairman:
- Alan Greenspan recommends buying gold...
Fabrice Drouin Ristori
Follow me on Twitter: @fabricedrouin