Supply and Demand WILL Matter!

Whether or not the prices of gold and silver have been “suppressed” has been a topic for several years now.  The “no manipulation” camp has argued from “governments and central banks don’t care, to the regulators have found nothing, a scheme this far and wide could never be kept secret, to it doesn’t even matter.”

It does matter, it matters a lot!  It matters because if even just one market is “rigged” it means there can be other markets rigged.  If gold and silver prices are rigged then by definition since they are the direct competitors of government issued currencies, the currencies are also priced incorrectly.  It means the currencies are valued “too high”.  It means that governments can issue currency which is valued too high which gives the issuing government more power than they should have based on fundamentals.

This past week Koos Jansen put out an article with a transcript of a speech given by Xu Luode, chairman of the Shanghai Metals Exchange.  In this speech given in June, Mr. Luode said on three different occasions his exchange supplied 2,000 tons of gold in 2013.  He said this gold was “supplied to Chinese consumers.”  I have several observations on this, first, kudos to Koos Jansen because this confirms what he has been saying all along by following Chinese imports of gold.  Secondly, it appears that I and others who have done this math may have been wrong in thinking it was the Chinese government doing the accumulation.  This speech argues the demand has come from the population or “consumers,” regardless, this was confirmation China is chewing up 2,000 tons of gold in a world where only a total 2,700 tons are produced per year (including Chinese production).

Going one step further we can add roughly 1,000 tons of demand which comes from India bringing the total demand to 3,000 tons versus new global production of 2,700 tons.  This is only 2 countries!  What about demand from North and South America?  What about Europe and the rest of Asia?  Or even Australia?  Do you see where I am going with this?  “Where” is the extra gold coming from?  Please don’t tell me “scrap” as I am sure you have already seen your local “cash for gold” shop pull up stakes and close …because grandma’s old earrings have already been sold.

The supply can only be coming from where it is (was) held, the central banks themselves.  Another “please don’t tell me” would be that central banks would never ever sell gold to suppress the price and create enough supply to portray “plenty.”  The central banks have already done this and done it in a public manner.  Remember the “London gold pool” back in the late 1960′s?  Do you remember August of 1971 when Nixon closed the gold window and we found out that our holdings went from 20,000 tons to just over 8,000 tons?  We “lost” 60% of our holdings back then in an effort to keep gold at $35 per ounce, why is it now impossible that central banks have again tried to suppress the price of gold?  Do you believe central bankers have matured, grown consciences and learned by their mistakes of the past?  All you need to do is look at money supplies and the amounts of debt the central banks have underwritten to see this is not so.  Or better yet, what have their responses to the financial crisis been?  Exponentially higher doses of the poisons that got into the mess in the first place, that’s what!

Getting back to supply and demand, it is clear demand for gold has been outstripping new supply for many years, Frank Veneroso first wrote about this nearly 15 years ago …yet the price has been dropping for the last 2 years.  Let me ask you this, what price would the stock of IBM be trading at if someone was able to print up a few billion extra yet “fake” shares out of thin air and sell them as real?  How can 50% of global silver production be sold on one market (COMEX) within 36 hours and then shortages suddenly appear?  If silver was truly sold then it should be so plentiful that picking it up off the street would give you a sore back!  If silver was sold and was plentiful then why has the U.S. mint suspended sales several times over the last 3 years?  The answer of course was they ran out of supply and could not source what was supposedly “so plentiful,” that’s what.

Before finishing on supply and demand I want to pose a trading scenario with you regarding just 2 banks or traders.  If the regulators turned a blind eye, what would prevent Bank A from selling 25% of global silver production on a Monday while Bank B “tepidly” bought throughout the day?  Then on Tuesday, Bank B sells whatever was bought on Monday plus say another 10%-15% of global production, while bank A “tepidly” buys what is sold and thus “flattens” their position with a huge profit in hand?  Of course Bank B is still short but the sentiment has turned bearish, not to mention the margin call liquidations their sales have created.  Bank B will worm its way out of being short by “buying to close” their positions from scared …and forced liquidations.  So bank A probably made more than Bank B without working as hard. The gentleman’s agreement will be reversed the next time and Bank A has to do the heavy lifting.  I wanted to mention this scenario because so many have asked me “how” it could possibly be done, this is how.

Physical supply and demand has been “made” to not matter over the last 2 plus years but it will, eventually.  It has mattered over the last 15 years and was evidenced by price.  The “operation” we have witnessed to depress gold and silver prices has been masterful with one exception, by definition “the game” has to end when the supply runs out.  The speech given by Xi Luode has thrown a bit of a monkey wrench in my thinking as he said “consumers.”  Now I have to wonder about their “official” or state purchases.  In my mind I can only imagine they are all lumped together and this figure of just over 2,000 tons is the sum total.  If this is not correct then it means the total demand is even higher than this confirmation.  It would be very difficult to believe central banks could be supplying a more than 2,000-2,500 ton deficit but we have lived through more strange events than this since 2008?

The bottom line is this, total global demand is and has been outstripping supply …and for many years.  The available “stock” must be running very low and while temporarily it has been made to look like supply and demand don’t matter … it will!  Like the saying goes, “it doesn’t matter until it matters,” but in this case it will matter greatly because once it is “allowed” to matter there will be little to no supply available as the ammunition has already been spent.  This is not a head scratcher in any fashion, short term the prices have been depressed by issuing “fake supply.”  Price will readjust violently once the true stock and supply is revealed.

Author : Bill Holter