On April 12, writer J. S. Kim posted an essay at www.theundergroundinvestor.com where he suggests a modest experiment that would easily disprove allegations that gold and silver prices are manipulated if, in fact, there really are no price suppression activities happening.
His proposal is simple in concept, though a bit more complicated to put into practice. For people who own “paper gold,” which consists of certificates, shares of exchange traded funds (ETFs), commodity contracts, and other such contracts that are supposedly redeemable for physical gold, he thinks that a conversion of 10% of these accounts into physical gold and silver would be sufficient to prove either that there is no price manipulation (if there isn’t) or that there is price suppression (if there is).
If there is no price manipulation, because there are adequate supplies of physical gold to redeem the paper contracts, there would be no significant impact on the price of precious metals. However, if it is true that there are significant shortages of physical metals to cover the paper contracts that are being marketed as being “as good as gold (silver),” then a move to convert 10% of the paper contracts into physical goods would cause a run on supplies. Any run on physical supplies would certainly help push up prices.
To accomplish this trade, owners of certificates could ask to convert part of their unallocated holdings into deliverable goods and have them shipped to an outside depository (or take delivery themselves). Those who own ETF shares but do not have enough shares to be able to redeem them directly for metal could sell some of their shares and replace them with physical coins and bars bought elsewhere, Commodity and other contracts that are coming up for maturity could have delivery notices tendered. Longer term contracts could be swapped for short-term contracts to take delivery, or could just be sold to be replaced with the purchase of physical metals.
To find out the truth, it would not be necessary to convert 100% of paper contracts into physical metals, as Greenlight Capital and some other investment funds did last year.
After the evidence of JPMorgan Chase’s activities in suppressing silver prices were entered in the Commodity Futures Trading Commission hearings on March 25, the story has gained extensive coverage worldwide. In the US, by contrast, there has been a virtual news blackout by the mainstream media. This lack of news coverage in the US may be starting to turn. A few days ago, the New York Post became the largest US publication to report the news.
Gold and silver prices continued to rise significantly into intraday markets in the US on April 12. This occurred despite the massive increase in gold and silver short sales in the COMEX from Wednesday through Friday last week. Demand for precious metals is now so strong that it was able to overcome some heavy duty attempts to suppress prices up to mid-day Monday. Apparently HSBC was very active selling gold contracts. In the silver market, JPMorgan Chase, who is widely understood to have the single massive short position, was surprisingly not part of these activities.
The US Mint has just told primary distributors that the tentative release date for bullion-issue 2010 Gold Buffalo one ounce coins is 5-6 weeks out. Right now, Buffaloes cost a much higher premium than they would when the Mint comes out with more product. If you don’t want to risk higher prices while waiting for them to come out, consider purchasing another low premium gold issue such as the Austria 100 Corona, US American Arts Medallion, or Mexico 50 Pesos, then swapping them later for Buffaloes.
Overall, precious metals activity in April is shaping up to reach much higher levels by the end of the month. If you plan to add to your holdings, consider doing so sooner rather than later.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/