Trust In the Gold System is Breaking Down

I believe we are now at a very important moment where the price of paper gold is beginning to disconnect from the physical price of gold. Premiums for gold delivery on the Shanghai exchange are now a constant and bullion banks and the COMEX are low on physical inventory for delivery. Although its unlikely the US Fed, BIS or IMF would let a gold exchange completely fail, its likely at some point there will be only cash settlement. Remember, its thought that there are 100 paper ounce representations of gold for every real physical ounce in existence. That means, as I mentioned previously, when the music stops, there will not be enough real gold to deliver. The music may not be abruptly stopping, but I can hear it fading away.

From KWN:

 Kaye:  “Part of the reason we’ve had this smash on gold is because it was very important to the central bankers and to the BIS that gold and silver not be seen as a viable alternative currency.  The reality is that the physical above ground stock of gold only increases at roughly 1% to 2% each year,whereas the amount of digital money that is printed by the Federal Reserve of US dollars greatly exceeds that by a huge factor.

“Now the central bankers are devious but not stupid.  They know that what I just said is true and they know that the market will catch on to that very quickly, so it’s very important for them to manage and suppress the price of gold, and that’s what they have done through the paper market. 

But we are reaching an important pivot.  As I’m talking to you gold is actually under pressure again, but what’s going on now is the typical gaming that you see which is related to the options expiry.  Options expire tomorrow.  This weakness is all by design.  These guys are extremely devious and very coordinated in the way they manage the price of gold.

The trading action now in gold is meant to discourage people who have reentered the gold market because of the improved technicals.  But despite the ongoing manipulation we have incredibly strong fundamentals, one example being the fact that the lease rates for gold have gone negative and stayed negative for two weeks.

What this means is people are paying a premium for physical gold today vs taking a paper promise from the COMEX or a bullion bank for delivery in a week, two weeks, or a month in the future.  So the fact that people will pay a premium for delivery of gold today tells you everything you need to know. 

Negative lease rates simply mean that the strains are so great in the system, as it relates to delivery of physical bullion, that banks will pay a premium.  This is a bizarre situation.  What this strongly suggests is that the system is breaking down.

It suggests that entities which are in the know, sovereigns and central banks that want to accumulate gold, they don’t trust the system anymore.  They don’t trust the paper contracts.  So the paper contracts for future delivery trade at a discount to current delivery.

What the market is saying is, ‘We want gold today, we don’t want your paper.  We don’t want to hear from you JP Morgan and we don’t trust you COMEX.  We want gold and we want it delivered physically today, and if you can’t do that we don’t want to do business with you.’

And this is why gold for spot delivery today trades at a premium to the paper for future delivery in a week, a month, two months and three months.  The gold delivery system is all based on trust, and trust is breaking down.  What this means is that the set up for gold is as good if not better than Nasdaq tech stocks in the early 1990s.”