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Old 04-04-2011, 11:22 PM
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Default Real Bullion Begins to Decouple from Paper-Bullion

Real Bullion Begins to Decouple from Paper-Bullion
By Jeff Nielson
Created 04/03/2011 - 12:53pm
Posted on 04/03/11 at 12:53pm by Jeff Nielson [1]

In a commentary from the middle of January (“Precious Metals Default Scenarios [2]”), I explained how large differences between the gold and silver markets would mean that a “default” in the gold market would be much different than a default event in the silver market.

Specifically, with silver having major industrial demand and with the world's silver inventories [3] having literally been “consumed”, there will likely be an outright “fail to deliver” which leads to a formal default in the silver market. Conversely, the gold market is much different.

To begin with, all of the world's gold has been preserved. While this by no means indicates that gold is “abundant”, it does mean that in any potential-default scenario, the bankers would likely be able to scrape together enough ounces to forestall such an occurrence. Alternately, because so much of the “gold market” merely trades paper between themselves, then the mechanism of “cash settlement” (i.e. informal default) can be used to prevent a formal default from occurring.

I further added:

In reality, as the “cash settlements” continue to get larger and more frequent, at some point one or more large holders in this banker Ponzi-scheme are going to lose their nerve, and insist on real bullion rather than paper bribes. Such an event does not need to result in an official default. It merely needs to spook the herd. [emphasis mine]

As word gets out of some prominent investor refusing any quantity of banker-paper in favor of physical bullion (i.e. real “money”), this will cause the holders of $100's of billions of dollars of “paper bullion” products to ask themselves a very pointed question: “am I holding ‘bullion' or am I holding ‘paper'?” [emphasis mine]

More importantly will be their response to such a question. The two obvious responses are either to demand delivery or to sell their paper bullion...

Flash forward to today, and we suddenly see a new reality in the gold market. Investors are selling their paper-bullion, while loading-up with real “physical” bullion in ever-increasing quantities. Three news stories released over the weekend highlight this “new reality”.

On the one hand, we see the most-dubious of all the paper bullion-ETF's, the SPDR Gold Trust (more commonly known by its trading symbol “GLD”) experiencing the largest liquidation of units in the history of this fund. From the 1st of January until the end of March, unit-holders dumped 5.4% of this banker Ponzi-scheme.

Meanwhile, in the world of real bullion, two other news items highlight the fact that the sellers of actual, physical bullion are seeing their own inventories cleaned-out as fast they can lay their hands on more metal. One headline reads “ [4]Gold Bullion Dealers Rejoice At Continued Market Climb In Improving Circumstances”. [4] Obviously these sellers of actual gold didn't see any “liquidation” taking place in their businesses.

At the same time, the irrepressible U.S. Senator, Ron Paul has some pointed questions [5] for the U.S. Mint – which is failing its statutory mandate to provide a supply of legal tender gold and silver coins equal to demand. Paul has hinted at a solution to help increase the supply of U.S. minted coins. Of equal, if not greater importance, Paul is also crusading to eliminate the ridiculous taxation on gold and silver legal tender coins – which (as I have often pointed out) amounts to a ridiculous tax-hypocrisy [6], where “good money” (i.e. gold and silver coins”) is taxed, while the bankers' worthless paper currencies are not.

Clearly the time has come for investors to ask themselves whether we are now seeing the early stages of the disintegration of the paper-gold market. We can only be encouraged that we must be close to such an event when we read all of the pathetic excuses made by Reuters for the large decline in GLD holdings.

Benzinga is a news network that provides market moving financial news and opinions to traders and investors. It features opinions from experts in industry while also covering the overall news of the day.
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