Gold Market Comments - October 7, 2008 - Paper Gold & Silver Market Failure Pending? Massive Price Increase...
As noted yesterday, in late 2002, Dr. Bernanke remarked that the private Federal Reserve Bank might consider “unconventional measures" to stave off deflationary pressures. This morning a new radical measure was announced which invokes depression-era emergency powers to allow the Fed to buy massive amount of short-term debt/commercial paper, a roughly $1.6 to 1.7 trillion market of which around $1.3 trillion worth of commercial paper would qualify*. By buying unsecured debt instruments, we are approaching a more modern day Weimar Republic set-up which will lead to a further demise of the US Dollar by more aggressive monetization of debt. The digital printing presses around the world are injecting incredible liquidity into the system as the financial system continues to crumble.
Given the critical state of the global financial situation the paper gold and silver prices remain at very depressed levels. The true physical markets are showing very high premiums, as noted yesterday, over the paper gold and silver derivative products. I strongly believe that physical demand for gold and silver will very shortly set itself free from the paper market pricing structure resulting in an explosive move higher. A growing number of people are starting to accept this likely outcome.
Last night on CNBC, Jurg Kiener – CEO of Swiss Asia Capital – also makes a mention of the upcoming failure of the paper gold markets: “We have a two-tier market, paper on Wall Street where the bankers continue to gamble like with everything else and the physical market where the physical price is real hot and people cannot get it.” What does this mean? “Owning gold is the best thing you can have. This will put pressure on the paper market, in the LME and COMEX … and we are very close … what we will see are the paper contracts on precious metals defaulting. And with that we will get a massive price increase.” So when the paper market defaults, what kind of price spike will we see? “At least double the price in a very short period of time.” – I cannot add anything further to these comments since Mr. Kiener’s sentiments closely echo mine. The paper markets representing gold and silver are becoming fraudulent in their pricing abilities. The true market forces will prevail over this counterfeit marketplace.
We are witnessing once in a century, or perhaps longer, financial event where gold and silver offer the only real protection. The U.S. treasury debt market may eventually succumb to this crisis as well at which time gold and silver would move to levels difficult to imagine today as it returns to its true historical attribute as currency.
Gold and silver mining stocks continue to be directly influenced by the general equity markets. Of note, oil has returned back to $90 a barrel, commodity prices are dropping meaning that future margins should increase = higher profits. Production costs appear to be stabilizing if not decreasing in the coming months. This will become more evident shortly which will give another boost to the underlying fundamental case for mining stocks. With gold and silver set to skyrocket soon, it will soon become evident that many gold and silver companies are selling at incredible discounts. A flood of capital that is currently focusing itself on physical gold and silver will soon divert funds into gold and silver companies too. This may accelerate as well with the physical shortage preventing new capital from finding physical gold and silver and therefore mining equities will become even that more in demand. This is a relatively tiny market so it will take very little of the overall capital floating around to sharply rally these investments. Short-term caveat is downside risks remain with the general markets looking to take a further dive, but the ensuing reversal will likely be incredible. Also of note, in late August I produced a public report entitled, Is Your Portfolio Properly Positioned for the Next Move Higher in Gold and Silver? which discusses some strategies in selecting the right investments.
- Peter Spina, GoldSeek.com
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