Paper Vs Physcial Gold Bifurcation Cannot Last

From Goldmoney.com:

More recently all members of the Shanghai Cooperation Organisation, a common security and trading bloc led by Russia and China and incorporating the bulk of Asia’s land mass, have been accumulating gold. Between current SCO and future members (India, Iran, Afghanistan, Mongolia, Belarus and Sri Lanka), with their citizens numbering over 3 billion people, they have together cornered the global market for physical supply, without even taking account of demand from the rest of South East Asia’s gold-hungry population.

The result is that gold markets are now failing to clear. The outcome is a choice: the West will either have to stop intervening and allow gold to find a level where physical and derivative markets interact properly with each other, or capital markets in the West will face a growing crisis likely to spill over into other markets. While these outcomes were always going to be a choice to be made at some time in the future, the disconnection between physical gold and derivatives has become so great that it is now an immediate concern. 

Record Shorts (Updated)

Whoops! No not that kind.

Hedge funds are shorting gold in a massive bet that gold is going lower.

 From Zerohedge:

Well, they've finally done it.

The Consequences of Manipulating Currencies (and Gold)

You may not even have noticed that overnight both gold and silver were smashed in the Asian markets. The bounce back resulted in an up market for both today in US markets. So in case you missed it, here's what it looked like:

 

While raids on the precious metals continue causing wild gyrations, there is clearly demand for the real thing as inventories are taken down. As I've shown in recent posts, the paper price is getting hit while physical demand soars.  In India, the Finance Minister is begging people to stop buying gold.

Maguire on Delays in Gold Delivery for Wholesalers

One of my themes is that as we see the demand for physical gold increase while the paper demand falls we see artificially lower prices. And this is always means shortages.

From KWN:

Eric King:  “On the physical side, what is availability if you want to go in and buy a very large order of gold?  Is there a delay?

Maguire:  “There absolutely is.  Let’s differentiate between the retail bars, which we know there is a delay on, there is also a delay on wholesale bars.  And the larger the size, the longer the wait or the higher the premium.  We’re seeing that now.” 

Gold Demand: Physical Up, Paper Down

This is the bifurcation between physical and paper gold I had been expecting for the last 18 months or so. The real question now is, does paper price dictate the gold price going forward? Or does physical demand "take control"? I suspect we will see weakness in the price reported in mainstream financial media reflecting a lower paper demand. At some point though, the availability of physical will become increasingly scarce and we should hear about rising premiums for physical.

The Physical Gold Premium is Going Up.

If you read my last post, you've got an idea who's buying the real thing even as others sell the paper.

From Zerohedge:

Shortage of metal drives premium higher as customers told to wait for delivery

China's Five Year Gold Plan

China  has a plan. And it includes a lot of gold. Below is a translation thanks to Google Translate. Its not a perfect translation but you'll get the point.

China clearly understands that nations with large gold reserves have an advantage in international markets with regard to the strength of their currencies, especially in times of financial crisis. They see the strength of both the dollar and the euro despite the recent poor monetary policies that their central banks are implementing. And as you'll see below, they note that despite the US' 8,000 tons of gold we keep printing (and diluting) dollars that are worth less and less, yet the dollar has not fallen as much against other currencies. To put it more succinctly, the US gets away with a lot of currency abuse as we print trillions more dollars because we hold so much gold, despite the fact that we are printing way more than we even can back with the gold we have. It gives us a special privilege. And now China wants that privilege too.

What follows is a translation of China's five year plan with regard to gold.

Dow 10,000 Vs Dow 15,000

Simply stunning

 Watch the video here.

	1999	2013
Oil	$16	$95
Gold	$280	$1,449
10 Yr Yield	5.27%	1.74%
Jobless rate	4.20%	7.50%
Trade Deficit	$18.37 Bn	$38.83 bn

S&P 500 All Time High? Not in Real Terms

If you remember my post from March 10th, The (Real) Dow is Still Down from All Time Highs, this post will be no surprise at all. Even with the S&P 500 hitting a new (nominal) high over 1,600 its still less than its true inflation adjusted (real) value.

From Marketwatch:

Consider the data, courtesy of data compiled by Yale University finance professor Robert Shiller. In inflation-adjusted terms, the S&P 500 SPX +0.52%   hit its all-time high in early 2000, at the top of the internet bubble. If we were to denominate that index’s level in today’s dollars, the S&P before the bubble burst would have been above 2,000 —24% higher than where it stands today.

To be sure, dividends soften this blow — but only partially. Even with dividends re-invested, the inflation-adjusted S&P 500 index today is below its early-2000 peak.

And this is even more fascinating because it forecasts the future returns over the next tn years.

Visualizing Gold Bifurcation

bi·fur·ca·tion  

/ˌbīfərˈkāSHən/

Noun Division into two branches or parts. A thing divided in this way or either of the branches.

And this is what it looks like:

Even while the price of gold has bounced back, holdings of GLD is falling.

Why?

Paper gold demand is falling while physical gold demand is rising.

A Shortage of Physical Gold & Silver

Below is an interview with James Turk on KWN. The links and emphasis were added by me.

Turk: “It is not too surprising that the metals traded lower yesterday Eric, given that London was closed for a holiday.  Therefore, a major part of the physical market for the precious metals was not participating yesterday.  So the paper shorts in New York pretty much had a free hand to run the market lower, which they did, and they are continuing the push lower today as well.

Nevertheless, there are telltale signs of stress clearly showing in the physical markets.  By stress I mean that supply is exceptionally tight.

Ron Paul: "This Is A House Of Cards"

From Ron Paul's The Free Foundation:

(Emphasis in bold and italics are mine)

Last week at its regular policy-setting meeting, the Federal Reserve announced it would double down on the policies that have failed to produce anything but a stagnant economy. It was a disappointing, but not surprising, move.

The Fed affirmed that it is prepared to increase its monthly purchases of Treasuries and mortgage-backed securities if things don’t start looking up. But actually the Fed has already been buying more than the announced $85 billion per month. Between February and March, the Fed’s securities holdings increased $95 billion. From March to April, they increased $100 billion. In all, the Fed has pumped more than a half trillion dollars into the economy since announcing its latest round of “quantitative easing” (QE3) in September 2012.

The Gold Massacre of 2013

I've been busy the last several weeks and so have not posted since the April 12th & 15th historic sell off in gold. Today I can look back with a little perspective. It inspired me to reread a post from February of 2012 when I wrote The Gold Leap Year Massacre. In that event gold sold off 5% in one day. It was a huge move but not unprecedented by historical standards. I wrote back then: