PMS: Precious Metals Squeeze?

image With the Dow futures down a couple of hundred (actually it’s more), the first thought that crossed my mind was “Gee, one of the Chinese markets must be back from going Lunar…

Well, sure as (Insert your favorite term here), yes the Hong Kong market was back and instead of being King Kong, it had a better than 3% beat-down. In fact, it was almost a 4% beat-down.

Now, should the U.S. go through something like that, based on the Wednesday close, of 15,914, the drop would come in at 613 points..

Is this what I expect today?  No, of course not.  That would be too simple and too logical.  At least until Janet Bringer of Free Money is done talking to the Senate.  Then?  Well, you never know, but a couple of hundred down pretty much seems baked in the cake.

Besides, Ms. Yellen was already blaming the Rest of World (RoW) for our woes, anyway, so here’s our chance to do the Fedriotic thing and prove she was right.  We know the Fed is on pins and needles about the next couple of weeks in China because stories are making the rounds like The Fed is watching China very, very closely right now; who wouldn’t?

This set up was only the first punch in the eyeballs this morning.

The REAL one is something I’ve had written down on the backs of envelopes for a long time and never spoken too much publicly about it – not wanting to be an alarmist and all.

But has it occurred to anyone besides me that would are in many ways set up for a perfect paper-metals squeeze?

Let me explain:  I have seen estimates that there is as much as 100:1 coverage (printed paper promising gold or equivalent in cash) for every ounce of physical gold out there.

Even if you discount this deeply, you still can see a situation where the paper-hangars might was to get a little closer in terms of marking their paper to market.

So here is this morning’s mental exercise:

Pretend for a moment that we have one investor who had purchased a piece of paper that claims to be backed by gold.  Our paper gold owner may have – and this is being terribly conservative here – nine players who will sell an ounce of paper gold and there could be one player who has the honest-to-God physical.

Which one does he buy?  I would hope the physical since we have been telling readers forever that if you buy paper gold, you aren’t getting the gold, you are getting a piece of paper with words on it.  Oh, sure, gold may be one of the words but the underlying is, well, emphasis on the second half of that word, if that’s not too obscure for this hour.

Even so, the gold may not have gone anywhere in price, because there was only the one buyer.

Well, suppose now that the paper gold people decide to sell a lot more paper.  And maybe they are going out to buy some commodities to hedge.

The very first thing they find is that no one wants to sell physical gold.  Oh, drat. 

At one point this morning the price of gold was up 3.52%.  And for a one day move, a bump in gold of more than FORTY BUCKS begins to get our attention.

If you aren’t a long-term subscriber to our newsletter, you may have missed our many discussions on relative value.

I won’t give you the whole rhyme and verse about how the numbers work out in the long term, but remember in 2001, Ures truly bought physical gold when it was $273 per ounce.  This was August of 2001.

How has our lone gold coin done since back then? 

Well, since we bought it, the price of the yeller dog is up 4.53 times.

Now, the S&P closed that day at 1,133.58 – this was before 9/11, remember.

Now, let’s say that the S&P miraculously closes today right at the Wednesday close.  That index was up how much since the day I bought that lone gold coin?  1.634 times.

But even this doesn’t give us the absolute by-God reality of purchasing power because so far we have not even tried to consider the impact of inflation.

Over at the Minneapolis Fed, they have a Truth Detector right on the home page on the right side called “What is a Dollar Worth?”

If you put in the price of something in 2001 and the price it to 2015, you will find that something needs to have gone up 1.336 times its pricing in 2001 in order to be approximately where inflation puts things today.

With this in mind, we see that the real return on gold has been pretty damn good – far better than investing in the S&P.

In fairness, a staunch defender of the stock paradigm could argue that “Ure is all wrong because he doesn’t count dividends!

All of which is true.  But I don’t count commissions, changes in the Index as things come and go, and I don’t even begin to grapple with the tax implications of this and that. 

Important disclosure here:  I still have a tax loss carry-forward this year because before we started going to “the boats” (the casinos in Boosier City, LA) I stay play-at-home gambler in my spare time with a few non-critical dollars.  Bad move.

When comes to the real “What do we do with the large pieces of net worth?” There is still NOTHING like a paid off home, even if it’s a comfortable, totally ticked-out mobile home in the East Texas Outback.  The second and third place when I was working this out back then was bonds and gold.  In 2005 we loudly announced buying that lone silver round between $6.94 and $7.03.  Still, with silver, the future’s market puts it at a high of $15.75 so far today.. You can run out the numbers compared to the S&P but you should be able to do it in your head if the coffee has kicked-it yet.

The only bitch about being ridiculously RIGHT in the long-term is that the tax rate on non-numismatic coin and bullion was up to 30%, but even this in a 10-year period still seems to have kicked the butt of almost all paper assets.  Maybe you bought GoPro early, I don’t know.

We can talk about all kinds of who’s and what’s  but I don’t have time for that.  For what it’s worth, with Iran looking at coming off the Petro Dollar and with the Saudis unloading assets while driving down the price of oil, and with a Muslim Civil War on the horizon in the Middle East (and with Europe full of potential partisans to take the fight there, too), and with idiots in Washington insisting on bringing potential partisans here, too, there is nothing so reassuring as living by the Law Of One.

One gold coin, one long gun, on box of ammo, one pistol, one garden, one year of taxes ahead….well, you get the idea.

People are easily confused by zeroes.  Try to get over that.  Look at something else.  One dollar in 1913 will buy about 4.2-cents today – paper goes down in value.  So it TAKES MORE PAPER over time, and this is why gold is up.  More paper (what do you think the Bureau of Engraving and Printing does?).

Buy things of enduring values:  Solid relationships, paid off property, steady income in current dollars, and small investments in things that have worked for a few thousand years.  Gardens and gold come to mind.

And no, we are none to keen to trade either for paper, thanks.

With countries like Sweden about to push their negative rates even further into the red (you pay the bank to hold onto your own money, instead of getting interest on it) the scam of digital currencies is finally outed. 

You do get this, right?  If everything is in digital money, there is absolutely no check on how government and banksters can collude to rip you off.  Go read the story on Sweden over here…it’s sickening.

Government’s Big Problem is that they are trying worldwide to get everyone who is a “little people” stampeded into the digital world where protections don’t exist.  And by branding people as terrorists and criminals for just having their own cash money on hand, well, that’s not the game and never was.

It’s about keeping everyone behold to The Man, who in this case may be a GS-20 we have never even heard of.  That’s be the pay grade for the federalcrat who runs the computer models that are likely coming to a terrible conclusion we’ve been anticipating for years:

If we don’t really screw the people, this sucker’s gonna blow!  It will be a (gulp) Second Depression.”

Which very well could be what comes next.  If this move in the next week or three takes out 1,720 or so on the S&P, you will be sorry you didn’t heed our advice to live below your means back when it could have been a voluntary decision on your part.  Now, it might just be made for you.

Oregon Standoff

Should be over thanks to Michele Fiore. Nice to see her make the WaPo today.

What Cleveland Ohio Teaches?

Two things:  1. How to inflame racial tensions with moves like Cleveland to Tamir Rice estate: Kindly pay $500 ambulance bill.  2. If you’re looking for a sensitive, caring city administration, you may wish to keep looking.

So What Does Flint, Michigan Teach?

Oh, that there could be manslaughter charges coming if there was negligence in the lead pollution poisoning that has been going on up there.

Worse, though?  It’s not just Flint that has the problem – it’s more or less all over the place which is why people like us with the delusion of living forever drink ONLY filtered water and why do you think we have our Berkey water filter ad at the top of the right column””?

Korea Heating

North Korea to expel S. Koreans from joint-run Kaesong industrial complex is only part of the story.  The real deal is this operation is how the North gets what little hard currency it can bring in and by closing it down, the East-West conflict takes on a new tone.

Remember what wild animals do when cornered?

Maybe it starts with executing the top General in the NK Army, ostensibly on corruption and graft charges.  Could it be he was really popped for refusing to saddle up and ride south?

And So…

The nice thing about days like this is it leaves us with the tantalizing question:  Will continuously expanding hypercomplexity be able to overcome compound socioeconomic insanity?

When you see the big flash, you have your answer. 

We don’t need a global reset.  We need a global re-think.

28 thoughts on “PMS: Precious Metals Squeeze?”

  1. Wow, George . . . Fiore must have magical time-traveling powers along with being a ditzy blond . . . it’s only 0615 where I am and she supposedly has settled the Malheur problem at 0700. Praise be for attention-seeking politicians who should keep their over-inflated egos out of another state’s business. The FBI should get the credit for when this farce ends. She needs to go back to Nevada and learn her manners!

    • Would that be the same FBI that is going to roll over and let Hillary walk? The same FBI that popped a woman holding an infant in her arms in Idaho? When you are from Nevada you have a little different attitude because 86% OF YOUR STATE IS OCCUPIED BY THE FED GOV.

  2. I know I need another coffee, but I’m wondering just how easy it will be to sell a gold coin in a cashless economy?

    Agreed, it might not be any different, BUT, if Gov and Banks refuse to recognize gold within their control of all transactions, then (illegal?) barter and/or black market transactions might be the only recourse.

    Just another motive for pushing “cashless”?

  3. In addition to the COMEX paper to gold ratio which is probably closer to 300-1, consider the rehypothecation of leased gold, which in some cases may be as deep as seven layers which means there are seven parties with a claim on an ounce of gold that quite likely moved to china years ago, and is not coming out. Most of the western central banks have leased out their gold reserves, as it allows a return on the reserves, BUT ALSO ALLOWS THEM TO KEEP THE GOLD ON THEIR BALANCE SHEET AS AN ASSET!

    The problem China faces at the moment is that the dollar bubble has inflated the world economy, and that deflation needs to happen before economic sanity can return to business and the markets. The country that deflates first is going to be the first out of the chute for recovery. China would like to do this, but if they devalue their currency while the western printing presses run without limit, they risk turning China and its manufacturing assets into a massive fire sale opportunity a la the economic hit man effect. One way to stop this is to simply demand that all Chinese products be paid for in Yuan, which would significantly raise the demand for their currency. As massive as the Chinese economy is, the $100 trillion in excess capital sloshing around the world could easily overwhelm their currency if they simply devalue without protection.

    China’s ace in the hole would be to simply offer the equivalent of $2000 per ounce for all above ground gold, payable only in Yuan, which is a definite possibility once the Shanghai metals market opens next month, trading only in physical metal. The COMEX, currently holding only six tons of gold to cover all the paper, would just vanish overnight, and all that paper would have to be settled with cash. What nobody is saying yet, is that with all the COMEX paper outstanding, that the same party is holding both sides of most of those positions, just as Enron did with the electricity market before they failed. There are still untraceable billions missing from Enron that went into some of Enron’s 2500 offshore entities that were holding the favorable side of the position when Enron went belly up. The government simply did not have the resources to unwind the whole Enron operation.

    In today’s markets, paper rules, and if you bet against the paper and win, as it was so succinctly explained in the movie The Big Short, your win means the end of the world for one hell of a lot of people.

    That’s how it looks from Ecuador.

    • Ecuador one of my thoughts pertaining to china is that they do a surprise 30/40% devaluation – announce that they are DE pegging from the dollar turn around and announce what they really own in gold reserves and they will now back the currency with a basket of precious metals and reprice good delivery to $10,000 an ounce and let the world know that whatever they think they know to be there reserves at either the FRBNY or Ft Knox in fact do not exist – instant destruction of the USA without a shot being fired.

  4. l am confused: paid-off survival platform, garden space, (and several chickens):make sense. but “steady income in current dollars??”… paper currency may soon be used for wallpaper, and that steady income can easily ancestors fought in the Revolutionary War as well as the War of Northern Aggression- l understand the concept of sudden deprivation due to conflict. lt can happen quickly. please explain how a steady income of dollars is necessary….l neeed to know your thoughts on saving paper dollars.thank you

  5. …postscript: will preciousc metals be confiscated and /or devalued if the economic SHTF? better to use paper to buy vast quantities of tobacco,liquor,toilet paper and sugar NOW for bartering??(methinks YES).. and GEORGE-get those chickens ASAP!! trust me on that

  6. No problem with negative interest rates. If banks charge -1.5% interest on deposits, simply put cash in mattress and it will earn you +1.5% while you sleep!

  7. JW, agree with that, not sure how anyone other than a dealer would be able to value and trade a coin. While the math you show George is good if one happened to be smart enough to buy at sub $300/oz prices, but if you purchased at $1,700+/oz you’re still smarting quite a bit. And again since there’s no real answer about how any of the hard Au might be used, its probably not much different than the old S&H Green stamps.

  8. Are Banks, oil, credit card, and other major companies buying their own stocks, to slow the market decline artificially?

    • I have read that when a company buys its own stock, those that sell to the company usually are the company exec’s who are getting rid of their accumulated stock bonuses, and of course the price of the stock is unnaturally high.

  9. “100:1 coverage (printed paper promising gold or equivalent in cash) for every ounce of physical gold out there”…right on the money but perhaps worse.

  10. Right on the money George……I have heard rumors that it is much higher..and I wonder where all our gold has gone….not in Ft Know anymore.

    “100:1 coverage (printed paper promising gold or equivalent in cash) for every ounce of physical gold out there”

  11. Saw a link to your site at Permabear. Yes we will have a depression, like duh. At my site, I have followed the creation of a massive commodity based bubble when I first noticed China shipping in Massive amounts of Copper during their Chinese New Years in 2009. This was my learning tool to study the anatomy of a Bubble. SPX should stop bottom around SPX 577ish. Materials and Economies should finally be rebalanced after all the damage the Global Central Banks and Governments did.

  12. Water filters may alter the taste of water by running it through a carbon filter bed. but unless it includes ion exchange resins it will not take out ‘the baddies’ like fluorides, activated carbon will remove some metals but if you want to get cleaned up water, buy a reverse osmosis unit. we have one I bought for a bit less than $100Aus and change the membrane and the ion exchange column and the carbon column every 2 years (recommended). the water after purification really improves the taste of coffee, and no scale build up in the kettle or coffee machine.

  13. About paper gold: That’s why I never trade commodity ETFs. Better to hold the real thing in my sticky palms. Else, “Curse us and splash us! My precious be lost!”

  14. George – on 1/25 you wrote that “We would not be surprised by summer to see gold down under $1,000 and silver perhaps in the $10-$12 range.”

    Do you still support your earlier claim? Thank you.

    • Yes. Gold could rise to the $1,350 range but then down IF THE FIFTH WAVE UP IN THE MARKET gets organized. There is a small chance that the bottom is already in, but that will depend on next week. If we break under 1,720 sp then it’s over. Otherwise, new highs would be realized…it’s just when

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