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Gold’s Paper Price “Doesn’t Mean Anything”

by John Rubino on April 4, 2013 · 14 comments

In this week’s talk with National Numismatics’ Tom Cloud, he explains why the reported price of gold is not the real price.

DollarCollapse: Hi Tom. It’s been a brutal couple of weeks in precious metals. Last time we talked you said that gold could fall to $1,540. Your prediction is close to coming true today, with gold below $1,560. What are your charts saying now?

Tom Cloud: There’s serious support at $1,540, but if that doesn’t hold the next major support level is $1,380. I don’t see it going this low for a variety of reasons, but it is possible because when you have an asset that’s gone up for 12 straight years you need a pullback to shake out the weak hands.

DC: You mentioned that there are a variety of reasons that a drop into the $1,300s is unlikely. Could you give us some of them?

TC: First, China is still an aggressive buyer. It’s trying to build its gold reserves up to US levels (though who knows whether the US really has what it claims) and is a long way from that point, so presumably it would use a big correction to buy even more, which would moderate the drop.

From there the list is all over the place. Obama and Netanyahu [Israel’s Prime Minister] just met to discuss Iran’s nuclear weapons program. It’s highly unlikely that they’ll allow Iran to deploy nukes, so there could be more trouble in the Middle East soon.

The US kicked the debt ceiling thing down the road until September and now we’re just printing money with no restraint. This is functionally the same thing as raising the debt ceiling; they just didn’t call it that. You’re talking $300-$400 billion of new debt in the next five months, and historically the gold price has tracked the debt ceiling.

And finally then there’s seasonality. Historically the last four months of the year have accounted for 2/3 of each year’s profits. So the further we get into 2013 the more support precious metals prices are likely to see.

DC: What about the latest European banking crisis?

TC: Cyprus is potentially huge. The Laiki bank just announced that they’ll take 80% of their largest depositors’ money, while the Bank of Cyprus’ large depositors will lose 50%. This sends a message to people with uninsured deposits everywhere, and a large number of my calls this week have been people moving money out of banks and into precious metals because they were over the [deposit insurance] limit. But it’s not just large depositors who should worry. The FDIC only has capital equal to 5% of deposits. So if there’s a run on US banks even small depositors could see a haircut. This makes physical precious metals look relatively attractive.

DC: You’d think this would send gold through the roof…

TC: Part of the reason that it hasn’t yet is that the dollar benefits from turmoil in the eurozone banking system, and a strong dollar equals a lower gold price. But that’s not sustainable. Two of my biggest clients are exporters who say their business is off because the US goods they’re selling are getting more expensive as the dollar goes up. So a strong dollar also means a weak economy, which the government can’t accept.

DC: Is your order flow reflecting the weakness in metals prices?

TC: Just the opposite. Nobody’s selling and big customers are buying. We’re doing about 35 fewer sales per week but are selling more metal because the average order is a lot bigger. Meanwhile, premiums are rising and delays are lengthening. It takes two weeks or more to fill orders for silver maple leafs and a lot of other coins. Outside of the fall of 2008 and the spring of 1980 I’ve never seen physical supplies this tight.

DC: How can tight physical supplies co-exist with falling prices?

TC: There’s a disconnect between the paper and physical precious metals markets. The big banks control the reported price by shorting in the futures markets. But this doesn’t mean anything. The growing shortage of physical shows that there are more buyers than sellers at the artificial paper price.

For more information or to place an order, call 800-247-2812 or email Tom Cloud at tgcloud@bellsouth.net. Mention DollarCollapse.com for free shipping and insurance.

  • http://pulse.yahoo.com/_KTGVSXMZJD4U57OZ5ALH6JZ2IQ Edward Cate

    I don’t know who’s buyin’ paper gold and silver the shorts are dumping, but I suspect most folks are just dumping paper to buy the real stuff. JPMorgan’s got $4 trillion in assets, meaning that other folks owe it big-time. BlackRock, as a group of 7, is JPMorgan’s biggest major holder, with over $10 billion invested, and they just bought almost 12 million more shares in the 4th quarter of 2012. That’s one heck of a lot of OPM in one place. Eric Holder and the CFTC can do nothing without ruining it for millions of other folks. Talk about a rock and a hard place. But JPM is close to killing its own golden goose. Ain’t gonna be pretty.

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  • http://www.facebook.com/david.young.5249349 David Young

    Stay the course and buys the dips in both Gold and Silver. Hold your nose if you must, but convert as many rotting Dollars out of the global financial and banking system as possible and into a tangible asset such as precious metals that will protect your wealth and purchasing power. Any Government printing money to stay afloat never ended well or in prosperity. Just ask the Germans! Gold and Silver trade around the world for 23 hours per day, so ignore the price fixing arena known as the Comex/Nymex. Physical supplies are getting tighter and tighter in my WCM bullion business, and premiums are marching higher even as JP Morgan-Bernanke price-manipulated American Gold and Silver decline! Make sense to you???!! Government and its minions obviously do not have your best interests at heart. But money always goes where it is treated best, and American exchanges are on their way to secondary/tertiary status along with our debt-burdened country. GET OUT OF DOLLARS WHILE YOU CAN AND BULLION IS STILL AVAILABLE AT A REASONABLE COST. BUT BY ALL MEANS GET OUT OF THE BANKING SYSTEM THAT PAYS YOU NOTHING FOR TAKING THE RISK OF BEING IN IT. Sage of Wexford

  • WorkingClassStacker

    APMEX has 100oz bars of silver available for immediate delivery at a
    $1.19 premium to the paper price. They have plenty of Eagles and Maples
    and bars and coins and junk silver. I have been hearing about tight
    supplies and long delivery times for years now. If the physical silver
    market is so small and the price is so low why haven’t strong hands with
    deep pockets hoovered up all the metal by now?

    • wearescrewed

      Exactly, I can buy all the silver day and night that I care to. There is no shortage, only a shortage of the truth about this “shortage”

      • PaperIsPoverty

        Well, I can’t. I like to buy in person with cash and my local shop has had very little supply for weeks now because no one is selling. The big internet shops don’t mind breaking up monster boxes & making it up on premiums and fees, but the small retail market where you can keep your anonymity is pretty dry.

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  • Bruce C.

    There is a lot more to what goes in to the price of any commodity, and there are even more issues for precious metals, that Cloud is not explaining.

    First of all, “shortages” are relative to where and from whom you are buying. Generally, the larger the supplier or dealer the less likely you will find shortages. In fact, it will be when the largest volume dealers/distributors are out of stock that a true shortage is occurring. Right now, according to the largest sources that I know there is plenty of inventory on hand and gold and silver coins can be had within a few days, which is normal. However, according to a few small, local dealers around here in Miami they have nothing in stock so everything has to be ordered, so actual delivery can take a few weeks sometimes.

    Why don’t the small dealers have inventory? Mainly because of the recent price action of the metals, not because of an actual shortage of metal. As most of you know, the prices of all the PMs have been fluctuating for the last 6 months or so and trending downward. So a small dealer is reluctant to place “large” orders for stock because they fear that the price will be even lower when that stock is sold. Instead they take a wait-and-see approach so if/when sales are made they can be more assured of making a profit on the spread at the time the sales are made. Now, some dealers take it a bit further and actually try to arbitrage the time they claim it will take for delivery to “play the market” and hopefully be able to fill their orders at prices lower than the spot prices at each sale. (In my opinion, those are the kind of dealers you don’t want to deal with.) The larger dealers generally have the funds and/or a more sophisticated buying system to either have enough stock to fill small buy orders or have arrangements in place to secure rapid delivery to retail buyers from major wholesalers.

    (Importantly, all of this can work in reverse when prices are both volatile and RISING. When you go to sell your PMs in such a market you will probably not get as much as you expect because, again, the dealers do not want to be stuck with a bunch of metal if prices fall precipitously as, for example, when silver after quickly rising from about $20 to around $50 in 2 months and then falling to about $28 within a few weeks. Imagine a dealer paying close to $50/oz only to see it fall by 45% within weeks. Of course a buyer would have had to pay close to $55/oz at the peak. That’s how the business works.)

    All of this may seem to be off topic but it’s really not. The “paper” market follows the same principles, except that it is one step removed from the physical market. You could liken it to a mental market versus the physical one. It’s more flexible and nimble, and “sophisticated” in that it deals in pure fiat and has an amoral pragmatic perspective. It’s very similar to fractional reserve banking, in fact: Paper backed by promises that are reasonably reliable based upon layers of precedent and statistical data. Time is the medium in which it dwells, the more the cheaper and the less the more costly. Given a year, say, almost anything is possible and thus relatively cheap; given a week or a day then then one has to pay. In theory all “paper gold” is backed by gold, just as the dollar used to be, but the time frame can be different. It’s not necessarily “upon demand” as the dollar was pre ’71 at any bank within the Fed system. It’s more complicated than that, more TIME consuming, and that is it’s “advantage”. That’s why the paper prices of PMs are lower than what they would be in a purely physical demand market.

    So, gold’s paper price DOES mean something, but in a different sense than this piece’s title implies. It means that the paper peddlers think they

    • Bruce C.

      Sorry. Somehow the rest of my rant didn’t get posted…

      can cover the physical demand of their paper holders at the volume and price they calculate most probable, just as in fractional reserve banking. The point being that things are fast approaching a new modality, in which both bank depositors are going to become more demanding than the bankers expect and the “paper gold” folks are going to either demand gold delivery or sell their paper and buy physical gold directly. If that happens then the paper gold price will rise to reflect (i.e., price in) the cost of obtaining physical gold in volume on short notice. That’s when it will reflect the true price of physical. Until then, all gold fans should actually rejoice at this anomaly, because physical gold can still be bought at a discount because of the paper market’s anachronism.

      Finally, a much simpler way to say all this is that the vast majority of people/”investors” are still choosing to rush into one fiat currency or another at every crisis (the US dollar being the choice du jour) instead of PMs. Fittingly, given our overly politicized and socialized world, it’s a rare and satisfying example of “natural selection” in action.

      • Pete

        I used to believe the paper short conspiracy theory that ended with the imminent price explosion. This was “Hot” news on the gold/silver investing websites back in 2007-2008 with people like James Turk and Ted Butler predicting gold and silver would surge in price at any minute. After these predictions failed to materialize, I came to realize that the metals market has been quite rigged since before I was born (1971).

        Yes, there is evidence of a rigged, suppressed precious metals market, but this does not mean there will definitely be a huge price explosion in metals or a hyperinflation.

        • Bruce C.

          I agree with that, but I didn’t know I implied that either.

          Also, remember that there are plenty of charlatans to go around, especially in the PM business. I’m not saying Turk or Butler are shysters, but let’s face it they have a big vested interest in metals prices rising and creating a demand for them by advertising a believable and appealing scenario can make that self-fulfilling.

      • Siouxwestern

        excellent post, thank you.

  • packsack

    Paper gold & silver is nothing but of liars, cheaters, thieves playing a game of insider trick with a mark deck. Looking for suckers. Yesterday went to motel coin buyer here in town, had 1992 proof silver eagle, was offered a whole $23. 4 coin proof 1976 canada set over 4 ounce of silver in the wood case $ 85.00.

  • Chris

    I think we should look at manipulation of precious metal positively as it allows investors to buy cheap. If they are patient and if it is true that precious metal had been manipulated, then ultimately the market will decide the right price. I believe Fed had interfered in the bond market to the extent it is in the market full time and will not be able to move out of it. US budget is already in that situation. The deficit is US$1 trillion and cutting US$100 billion is considered fiscal cliff. To balance the budget so that US government finance can be put into a sustainable order, US$1 trillion has to be cut from the budget and it has to come from somewhere by cutting expenditure or raising revenue (in simple terms mean raising taxes). What do you call this US$1 trillion as compared to the US$100 billion fiscal cliff. This is like a car going faster and faster and the brakes are not working. It is okay if the car is on a straight road but what if it has to swerve to avoid a black swan.


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