Backwardation & zero offers

Bill Holter’s video interview yesterday contains some of the first detailed metal commentary since the FOMC announcement last week. Bill suggests that the Fed realises there is no economic recovery in the US and points to trade as the one indicator to look at in order to get a good picture of what’s going on. “Trade is slowing and hence global GDP is slowing. Ask yourself why they would even talk about negative interest rates if they were actually thinking about tightening”. Bill concludes that the suggestion of negative interest rates was a trial intended to soften expectations and after 80 months at 0%, it’s reasonable to suggest that they’ve lost confidence and control. 

Regarding metal, Bill confirms that physical gold and silver are both in very tight supply as mentioned recently by Michael Pento and David Morgan. Gold and silver are both in severe backwardation (those wanting a better understanding of backwardation can read Bill Holter’s own explanation from May). Silver on the retail level is in particularly tight supply. “The Canadian mint has ceased delivering Maples” (referring to the 1oz Canadian Silver Maple Leaf). The US mint is rationing their dealers and there’s anywhere up to a 6 week wait for Eagles. Regular readers will know of Bill’s tenacity with tracking the supply and demand of such products. This coincides with what seems to be a hard bottoming in physical silver pricing. “We saw last week and the week before that the premiums increased by the amount that the paper price went down”. 

We’ve written at length about the tight precious metal supply leading up to the FOMC decision and it consequently makes one wonder what their dovish announcement will do to the gold and silver markets from here. Bill paints a picture that may be hard to comprehend, saying that “we could see gold & silver go no-offer, meaning that nobody wants to sell”. In that case there would be no transacting and interestingly, as transactions are what determine the price, there would consequently be no way to tell what the real price of gold & silver actually was. Potential sellers would also be asking themselves “whether they’d accept dollars or euros or anything else for their metal”. Owners would only be interested in being paid in a currency that they can trust.  Bill suggests that in this eventuality, one would expect to see a world-wide exodus of the financial system and the way to do that is to take gold and silver delivery. Seeing weakness in the LBMA and COMEX inventories, Bill forecasts a scenario where the exchanges say “that’s it, we’re paying in cash - there’s no more gold” and this is a suggestion that has been appearing frequently in recent commentary. In Bill’s words, the current COMEX deliverable gold inventory of just over 5 tonnes is “puny”. Ultimately, current trends will see dealers run out of stock too.

Bill also spoke of what he sees as “a recent media firestorm” attempting to suppress public concern over dwindling metal supply saying that “it’s like there is a coordinated effort to say the vault supplies are adequate”. One of the arguments adopted is that there’s plenty in the eligible supply category but Bill explains that “it doesn’t work that way! That’s customer gold. If the customer doesn’t want to deliver it out, it’s not going to go into the registered category”. 

Speaking of customer gold, a seldom discussed issue is that of allocated and unallocated pool accounts. Bill sees these as becoming a significant fraud risk in the future and offers precedents to support this suggestion. He cites one recent example where Austin BullionDirect Inc. supposedly had US$200M - 300M worth of gold vaulted for customers. Ultimately, “they didn’t actually have any of it” and as a result, they filed a bankruptcy petition, Chapter 11 No. 15-10940 in the U. S. Bankruptcy Court on July 20, 2015. This is easily confirmed by looking at their website. “They’re now closed” and in the last few months, 3 unscrupulous dealers have closed under similar circumstances. What leads Bill’s analysis to the conclusion that pool account inventory is being absconded is that the price is going down in an environment where there’s more demand than there is production. This can only be possible if “someone has covertly added supply from somewhere and that can only have been from stock within vaults that had belonged to people”. In Bill’s opinion, the evidence suggests that such gold has been sold to suppress the metal price and that this has been done now for many years. In some cases, despite the gold appropriation, customers have still been billed for the storage of their non-existent stock; a situation that highlights the importance of only conducting business with a professional dealer that has an established history. 

Lastly, the interview covered current financial system stability. Although Bill takes quite a pessimistic view of the future (some would brand this as realism rather than pessimism however), some prudent points can be extracted. Investors should be prepared for a system reset which could involve the cessation of ATM operation and shortcomings in the distribution of essential goods and services. Wealth retention is of importance in such times and Bill warns about placing inappropriate levels of faith in government deposit guarantee mechanisms or fiat currency valuations. It is suggested that an allocation of wealth outside the banking system is an intelligent way to mitigate the risks of systemic calamity in the future.