The gold and silver markets took us on wild rides in 2011. Guess what? They will be even more volatile in 2012.
According to GFMS, one of the most respected analysts of precious metals markets, the Chinese market, government and private, will absorb more than 22 million ounces of gold in 2011, sharply higher than 2010 levels. That means that the Chinese are taking about 30-35% of all newly mined gold off the market. The total probably would have been even higher except for the difficulty in acquiring physical metal.
What will have perhaps the greatest impact on the gold market was just revealed within the past ten days. A London metals trader recently reported that the Chinese government is aggressively negotiating with multiple gold mining companies to purchase their entire gold output on long-term contracts. This is the same London trader who spilled the beans in 2003 that the Chinese were buying gold reserves, which was not confirmed by the Chinese nor reported by the mainstream financial press until 2009. He is definitely in a position to observe such activity and has a stellar record of accuracy.
To the extent that this is true and that the Chinese do succeed in signing contracts, this could have an enormous impact on gold trading. On the surface, it may appear that it shouldn’t really matter whether the Chinese acquire the same number of physical ounces of gold direct from the mines or by taking delivery of London or COMEX contracts. So, it may take a while for the general public to understand the implications of this shift.
If the Chinese purchase directly from the gold mining companies that means that fewer ounces of gold will appear on the London or COMEX markets. The COMEX is heavily leveraged, where it only has a small fraction of the gold to meet the contractual obligations of existing contracts. If it stops receiving as much physical gold as years past, it will have to sharply reduce selling paper contracts for gold and perhaps even close out a large number of existing short positions.
The impact on the London market, the world’s largest gold trading center, would be even more extreme. Theoretically London contracts are traded to result in the delivery of the physical metal. However, the market is currently leveraged to a greater extreme than the COMEX. At the Commodity Futures Trading Commission hearings in March 2010, analyst Adrian Douglas estimated that the London market could only cover, at most, 3% of its physical gold liabilities. Analyst Jeffrey Christian then testified that the London exchange only held one ounce of physical gold for every 100 ounces of liability to delivery physical gold!
Think about it. If the London market receives five million ounces less of physical gold in 2012 than it did in 2011, those who have sold contracts on that exchange may have to liquidate as much as 500 million ounces of short positions by purchasing metal elsewhere to fulfill contracts or by paying cash to settle their position. Even with recycled gold, annual global new supplies are less than 100 million ounces. Just imagine what would happen to the gold’s price if there was a supply squeeze anywhere near this magnitude!
Even if the Chinese don’t sign contracts to tie up mine production, there are still lots of brewing calamities that could cause prices to rocket upward in 2012. Among them are:
- The failure of one or more of the world’s largest banks
- The outright debt default of one or more significant national governments
- The US government takes further steps toward seizing the assets of private retirement accounts
- A default in delivery by a sizable gold or silver exchange traded fund
- A declaration of force majeure and the inability of the COMEX or London markets to continue operations
- More concrete evidence that the Federal Reserve and other major central banks do not have all the gold reserves that they are reporting as being in their vaults
- A continuing major downturn in the US real estate market
- If governments around the world are uniformly unsuccessful at achieving major spending cuts
- A detailed report of how and where hundreds of millions to billions of customer dollars were effectively stolen in the MF Global Holdings bankruptcy
- Huge inflation of the money supply by major nations
There are more potential catastrophes than these few, but I think it gives you the idea.
Even the mainstream media in the past few months is reporting just how many of the world’s major banks are in dire straits. Perhaps Bank of America is at most risk, with its share price right at the threshold where many owners would be required to liquidate their holdings of this bank.
The unfolding MF Global story could have the largest impact. The implications of how customer money disappeared could trigger a run of investors, fearful of also having their accounts stolen, withdrawing their accounts from every brokerage.
For those holding out hope that the economies might muddle through somehow, the agreements made in the past two weeks for the US government to sharply reduce the value of major paper currencies (as a result of inflation of the money supply, whether called quantitative easing or something else) is bound to lead to far higher gold and silver prices in 2012.
Sprott Asset Management recently filed paperwork to issue shares totaling $1.5 billion. These funds would be used to purchase physical silver. This single acquisition, which would be about 50 million ounces at today’s silver prices, could trigger a supply squeeze all by itself.
Gold and silver prices have been knocked down enough over the past few weeks to cause even the most ardent owners of physical precious metals to question the strategy of owning gold and silver. If you simply realize that no magic cures for the world’s financial woes have been achieved, and if anything, the troubles are getting worse by the day, I think you will feel more comfortable maintaining your gold and silver positions.
Instead of dumping your precious metals holdings, I urge you to make them more secure. If you own shares of a gold or silver exchange traded fund because of the convenience, sell them off and replace them with physical metals under your direct custody and control. Do not store physical metals in unallocated accounts. Convert any certificates into physical metals—while you still can.
Assume that any form of “paper” gold or silver ownership is at risk of loss, just like those who held such accounts at MF Global Holdings. Once you have secured your positions, you will be able to sleep better at night during 2012. Happy New Year.
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/ under “News & Articles”. His bimonthly columns on collectibles can also be read at http://www.lansingbusinessmonthly.com under “Articles” and “Department Columns.”His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.
China bought gold in 2003 when it was still dirt cheap and didn’t say a word. Now they’re supposedly doing it again, except this time they’re screaming it at the top of their lungs. If that’s not just a little suspicious, nothing is.
There is no saving gold. Bubbles burst. There are no exceptions. If you bought gold in 2001 you got to ride a real bull, but that rodeo is over. There is nothing safe about buying high. Gold was never going to hit the $2000 mark. That number was an above target sell signal. That’s why it collapsed at just over $1900. Not everyone is out yet though, and so it’s all about the greater fool and “profit taking” now.
So, Goldman Sachs is “predicting” an average gold price of $1810 for 2012, which would indicate a strong sell signal around $1700. If it manages to rally back to that point, you can expect to see a repeat of September’s crash with a major sell off taking gold down to around the $1300 mark by mid 2012 before repeating the cycle in it’s final plunge to the bottom.
There will always be a few gold bugs pushing their “precious” metal, but it’s important to note that bugs don’t ride bulls, they ride bubbles. Someone has to carry gold back to the bottom and you can bet your marbles that they’ll be screaming “buy! buy! buy!” all the way down. Wouldn’t you?
Real estate is the bull to ride in 2012. Rock bottom prices and nowhere to go but up. Europe might still be struggling, but America has ventured into new territory with a massive grass roots ‘Buy American Made’ campaign that’s stacking the deck in our favor like nothing we’ve ever seen before. Note our Confident Consumers and narrowing trade gap? Yeah… China isn’t going to lead this century. America is. If you want to ride this bull, I’d get on now.
Hate to break to James but living in fairy imagine land isn’t going to help him. Go try and place a big order in physical silver and see how long it takes for it to be filled. Physical gold and silver supplies are tight and getting tighter. The Comex has no future unless the are allowed to leverage contracts 1,000,000 : 1.
It’s people like James that will make it hard to help when everything falls apart. But God commands it of me. But if he were to snob talk me while I spent a silver dime to buy him a plate of food, you can bet your last green paper rectangle that you would go hungry.
I LOST A LOT OF MONEY IN THE MARKET OVER THE LAST YEAR I HANDED IT OVER TO A COMPANY THEY LOST MORE THAN I DID SO NOW I SAID THE HELL WITH THEM ALL AND I AM BUYING SILVER BY THE POUNDS ON A DOWN TURN MARKET WHERE AT LEAST IF I CANT GET RICH ON IT MY CHILDREN WILL SOME DAY BE RICHER IN THE HAND AND HEADS BY WATCHING AND LEARNING WHAT I AM DOING AND HOW OTHERS PANIC OVER NEWS LIKE THIS IT BORES THEM WHEN I TALK SILVER BUT IT WILL BURN IN DEEP ONE DAY SO I TELL THEM AVENGE ME FROM THE EVIL MARKETS BUY PHYSICAL METALS
what do you think is going to happen once the PAGE opens up and gets cranking full-boar? Death to the Comex! Truer price discovery of the phyzz? 1.2 billion Chinese buying like crazy (as well as Indians) will eventually cause more than the 2 paltry % of Americans to start stackin’ phyzz before it’s all gone. I’m about 90% in phyzz silver and the rest in phyzz gold and cash. 2012 is going to be another bumpy ride, but the trend channel for gold and silver will stay true just as over the last several years. The phyzz is not for day trading…it’s for very long term holding…remember, ounces of phyzz don’t change in value…the exploding bubble of over-printing fiat and massive devaluation of said paper is what actually changes, and that is why phyzz is the only way to go in this world of all dying fiat.
Save yourselves some trouble and start stacking silver now folks…as well as guns, ammo, food, and other essential supplies, cuz once inflation kicks in EVERYTHING is going to the moon including phyzz!
Funny, I’ve read the same ‘copy n paste’ drivel from James on 3 different sites/articles now. Wonder why, bet I can guess what situation he is in lol. Yeah, go buy a few houses James and don’t worry about silver and gold then. You seem awfully occupied with it though…
Looks like James is buying, lol.
Thank you, Mr. Heller, for some more insightful information you don’t find anywhere else–and all of it verifiable from multiple other sources. Of course, I’d never know what to be looking for were it not for you!
Even with the latest round of price supression occuring now, the price of physical in this area has NOT dropped. “Old” U.S. silver coins are still running $25 to $1, and the “buy” price from dealers is still up at 20 to 1. I’ve long ago thought that the spot price on the Comex has diverged from the spot price for physical. When it comes to physical, you generally have to take what is available. You might want to buy 50 ounces of silver, but when your dealer says “all I can get today is 28, do you want it all??”, something is rotten on the Comex.
As the price drops precipitously on the Comex some days, it’s hard to keep the panic at bay. But, after some REASONED, RATIONAL thinking, I always come to the same conclusion: NONE of the things which caused me to convert Dollars into bullion have changed. If anything, they’ve all become more worrisome and the situation even more precarious.
As someone noted above, physical is NOT for trading on a short term basis. It’s a LONG TERM INSURANCE POLICY against the continued devaluation and possible collapse of the U.S. Dollar.
For those out there saying gold is in a bubble, let me clear things up. The gold run up in these past few years are insignificant compared to the 1970’s. If we had the same percentage gain of the 1970, gold will end up peaking at $6,229! We’re not even close to that. The 70’s bubble burst not because people were afraid, but because they wanted to make easy money flipping it. Plus, extremely high interest rates of 20%, higher than the inflation rate. Unfortunately, today it is impossible to get interest rates higher than inflation because doing so would crash the economy and/or bankrupt the US! Plus, there are hardly any investors in gold mining companies. Speculative money always ends up in companies, but THAT’S NOT HAPPENING right now. People are still afraid of gold, so they’re selling it for 10 cents on the dollar (naive). A real bubble requires huge crowds at gold conventions, long lines at several pawn shops, the average beer drinking football loving Joe with a sweaty white muscle shirt supporting gold, the mainstream media talking good about it every hour, central banks ignoring gold as opposed to buying it (just like they avoided buying tech stocks and real estate during those bubbles), having more than enough gold for a gold standard. We’re in the second stage of a bull market. Someday, the price will skyrocket higher than Western economists could even imagine. Only then will gold become a bubble. It always ends that way. It’s just that the current run up seems so high today that many people are afraid of it dropping. When you look for a bubble, don’t just pay attention to it’s value in unstable US dollars.
Yeah, sign that sweet 30year note with Chase, err Fannie, err Freddie. Make it a really big house, you’ll need it to shelter that truly large brain you are sporting, Cochise. James, don’t give up your government job. Fundamentals, fundamentals, fundamentals……
I am still a believer, and still a buyer, of PMs. But I’m also a believer in the government’s and banking system’s unchecked ability to manipulate and suppress the PMs. I keep trying to rationalize in my brain that another 1933 style episode can’t really happen. But then I look at how blatant the manipulation is, and the total disregard for the Constitution. I still consider it a safer bet than fiat though.
Beware.
1. The world gold price is increasing day by day. Not just China.
2. It is calculated that there are 258,000 tonnes of gold in the world. This is the total amount we’re able to retrieve.
3. 103,285 tonnes has been mined since 1950 and 55,615 before that.
4. Only about 100,000 of gold is left to be mined.
5. Gold is about to wane, people!!
IT’S TIME TO FREAK OUT AND START BUYING!!!