Most people have no idea what is taking place behind the scenes of the precious metals market – in particular, the silver market.
For many of you, much of what I am about to say may seem like Déjà vu. But because of the timing and the way I see the charts moving, I find it to be my duty to go over this once again.
Most of what is determining gold’s price is paper trading – which is fundamentally flawed. The amount of paper gold and silver contracts that trade on the futures and equities exchanges easily outweigh the amount of actual physical trading that takes place.
That means it’s the paper markets setting the price discovery for gold. It means that short term sentiment – and manipulation – are the causes of both gold and silver’s volatility and not the actual fundamentals of gold and silver themselves.
For example, in a report published last year (see Before it’s Too Late), Eric Sprott and Andrew Morris pointed out the significant discord between paper and physical supply on the Comex relating to silver:
“…Over 800 million ounces traded each day in April on (the Comex). Further, consider that as at the end of April there were only 33 million ounces of registered inventories to back up all of that paper trading. Just imagine if a mere 5% of all of that buying actually stood for delivery; the entire inventories would be more than wiped out.”
Over a year ago, I published a letter that revealed how most of the gold that is traded in the markets are not actually fully backed by the actual metal itself, as many believe (see The Silver Conspiracy):
For years, most people have assumed that the London Bullion Market Association (LBMA), the world’s largest gold market, had actual gold to back up the massive “gold deposits” at the major LBMA banks. But it doesn’t.
This was confirmed during the CFTC hearings when Jeffrey Christian of the CPM Group said that the LBMA banks have approximately 100 times more gold deposits than actual gold bullion. This means that for every ounce of gold traded in these markets, 99 of them appear from thin air. Has gold and silver been converted into a fiat currency in these markets?
In the LBMA market, for example, an average of 19.6 million ounces of gold was traded per day in July. The world has produced on average approximately 2,497 tonnes per year over the last several years – which is just over 80 million troy ounces.
That means the LMBA, trades nearly a year’s worth of worldwide gold production in less than a week.
In October 2010, we published another letter proving our theory and why silver will climb to new highs (see Enron Lives On?). Silver more than doubled in value since that time, as it nearly reached an all-time high of $50.
In both letters, I mentioned how the trading of both silver and gold is not only highly leveraged, but easily manipulated – especially on the silver side. Many of the shorts used to manipulate the price are both naked and heavily leveraged.
But what happens when these shorts need to cover? What happens when the actual fundamentals of driving gold and silver up reveals its true colours?
Back on July 2011, I wrote a piece on the South Rare Precious Metals Spot Exchange in China, as well as The Gold Exchange.
Here is the excerpt:
In brief, the Pan Asia Gold Exchange features a market-driven mechanism and provides two basic services: a physical gold purchase and distribution network and innovative products based upon physical gold – for anyone.
In short, that means simpler, quicker, and more cost-effective transactions between all parties for gold-related transactions. But more importantly, it means a new wave of capital injection for the gold market.
Here’s a video about the Pan Asian Gold Exchange (Make sure you watch it):
|click to play|
Even whistleblower Andrew Maquire (see The Silver Conspiracy), who is no stranger to shorts and leverage employed by the banks against precious metals, was seen featured in the video. He says the exchange promises better price discovery, less leverage, and should in-time dilute the effects of short-side concentration in both gold and silver.
We all know what happens when shorts have to cover…
The Pan Asian Gold Exchange could very well help send the price of gold into new territories.
A New Wave of Capital
The Pan Asian Exchange has signed an agreement with The Agricultural Bank of China (ABC), integrating its customer account information system with their platform.
That means the exchange will have direct access to the accounts of 320 million retail customers, 2.7 million corporate clients, and nearly 24,000 branches. ABC is China’s third largest lender by assets. When it went public last year, it became the world’s biggest ever initial public offering. It currently ranks No.8th among the Top 1000 World Banks and Forbes Global 2000 named it the 25th-largest public company in the world.
This is where it gets big. Real Big.
Imagine buying gold through your bank with the click of a mouse. The Pan Asia Exchange has now created the first ever rolling spot contract that will allow Chinese banking clients to buy 10 ounces (the minimum transaction) of gold contracts in RMB, through their account, and directly linked to the exchange. If you have an account with ABC, you can instantly buy gold, or gold contracts.
Think about it: 320 million retail customers and 2.7 million corporate clients, all with the same Chinese appetite for precious metals (see Age of America Over?); all now able to buy gold in 10 ounce increments with the click of a button.
Once more of these international contracts go live, we’re going to see a strong demand for physical gold as the drawdown of physical gold begins to meet the obligations of the contracts. Buying gold directly from your bank account – that’s real demand. It’s essentially like the SPDR Gold Trust, or GLD, with much stricter leverage guidelines and 100% backed by gold.
Because of the massive short positions against silver, and gold, every physical ounce of the precious metals taken out of the physical market and into the new Chinese exchange will force a massive short squeeze as leveraged short sellers have to cover their positions in the paper market.
There’s no doubt these highly leveraged shorts are extremely vulnerable and can easily be taken out by physical demand. When you go from trading paper to actual physical metals, that’s when the prices of these metals will skyrocket as the supply can’t keep up with demand.
This new exchange has just slowly begun to trade in local Chinese communities. But they’re going to be fully operational within 6 months. That means in less than 6 months, more than 320 million retail Chinese customers and 2.7 million corporate clients can buy gold online that is 100% backed by bullion – not leveraged pieces of paper.
Eventually, the exchange will be opening its doors to foreigners.
The US did it…why not Europe?
The world’s central banks have been printing a tidal wave of newly created paper money right under our noses over the past few years. And as I have stressed over the past couple of months, they won’t stop.
Since December, the ECB has provided more than €1 trillion of new loans in two separate tranches. In the latest tranche, 800 banks grabbed €529.5 billion of new loans at 1% for three years using almost any form of collateral.
While it may not directly be Quantitative Easing, the outcome is the same. Just like the US, this type of negative real interest rate loan is just another form of QE. It’s another way of injecting money without spooking the world, and without violating any charters.
This, in effect, means the banks effectively decide how much money is created. Because the ECB
does not directly monetize the debt of the weak sovereigns, which it is prohibited from doing by charter, it instead gives the commercial banks the ability to take their newly borrowed money and use it to buy sovereign debt.
In other words, it’s as if the ECB purchased sovereign debt through the commercial banks and is effectively “printing” new money without “technically” violating its charter.
We know currency is being devalued as a result. The amount of money being created is more than we’ve ever experienced – and the record breaking amounts won’t stop.
The opportunities to participate are mounting.
Until next week,
Disclosure: I am long gold and silver through ETF’s and bullion, as well as long both major and junior gold and silver companies.
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