The Road to Bullion Default: Part I

The Road to Bullion Default: Part I

Written by Jeff Nielson
Monday, 22 October 2012 12:26

Momentous events have taken place in global markets. With both the U.S. and EU announcing “open-ended”/”unlimited” money-printing (respectively); the exponentially increasing money-printing taking place in bankrupt Western economies has escalated to simply infinite money-printing.

This is nothing less than a death-knell for all Western fiat currencies, and our final warning that hyperinflation is now an inevitable fate. All that remains is for the (currently) clueless masses to realize that the paper they are carrying in their wallets is (in fact) nothing but paper – and then our own, modern Tulipmania will come to an ignominious end.

Gold and silver prices naturally reacted to this monetary insanity by jumping higher, reflecting the explosion which must take place in most asset prices; as our paper currencies plunge to their real value: zero. However, the rally was halted by a desperate counter-attack on bullion markets – with the result being that bullion prices have now trended sideways to lower for the past several weeks.
It’s important for readers to understand that there is no way the newly-announced money-printing has been (or could ever be) “priced into” metals markets. As the simplest of tautologies, you can never “price in” infinity into any market. Open-ended/unlimited money-printing means nothing less than an endless spiral higher in asset prices – until all this banker-paper meets the same fate as all previous fiat currencies: utter worthlessness.

Obviously, over the short term asset prices have not been allowed to move higher. The mechanisms for this manipulation are now well-known to sophisticated investors. While manipulative automated-trading algorithms allow the banksters to lead market Sheep around like the Pied Piper; the banksters’ massive derivatives casino literally allows the bankers’ gambling on our markets to dominate the markets themselves.

However, as I have explained on several previous occasions; there is a (huge) price to pay for such manipulation. The low prices resulting from the banker-manipulation in their derivatives casino must lead to the destruction of inventories; with the long-term result being even higher prices than if no manipulation had taken place in the market at all.

This naturally leads inquisitive readers to ask the obvious question: as inventories collapse, how/when will a default occur in bullion markets? Here we must make a broad distinction between the gold and silver markets.

In the gold market, gold’s status as the world’s best money has resulted in near-perfect conservation of this metal. Put another way, it is at least theoretically possible for nearly every ounce of gold ever refined to be collected into a single stockpile. On a practical basis, much (most?) of the world’s gold is contained in precious cultural artifacts and/or heirloom jewelry; and would/could never come onto the market at any price. However, there can be no question that large stockpiles of gold do exist that could come onto the market.

The situation is entirely opposite with the silver market. Nearly a half-century of concerted manipulation of this market has resulted in most of the world’s silver (literally) being “consumed”. It has been used in a plethora of industrial products – generally in tiny amounts – and most of that silver is now scattered around the world’s landfills, in microscopic concentrations.

Understand that it was the under-pricing of silver (i.e. manipulation of the silver market) which has resulted in the destruction of inventories. Had silver been priced at its fair-market value; much/most of this industrially-consumed silver would have been recycled. We know this because only a dramatic increase in recycling could lead to equilibrium in the silver market; and by definition the “fair-market value” for any good is the price which results in market equilibrium.

Thus the destruction of silver inventories – by itself – is conclusive evidence of the manipulation of the silver market; since the magnitude of that destruction can lead to no other possible conclusion. Between 1990 and 2005 alone; global silver inventories plummeted by approximately 90%. Over the past half-century; noted silver expert Ted Butler estimates that global stockpiles of silver plunged from approximately 6 billion ounces to somewhere around (below?) 1 billion ounces.

What has been the consequence of this inventory destruction? The price of silver has moved from the 600-year low (in real dollars) reached in the late 1990’s of under $4/oz to well over $30/oz today – a nearly ten-fold increase. That multiple was significantly higher when the silver market reached its short-term peak of nearly $50/oz in 2011.

Meanwhile, we no longer have access to reliable inventory numbers in the silver market. Since 2005, inventory numbers have been falsified through a clumsy record-keeping sham, so we have no idea of precisely how much silver remains. We do know that inventories continue to plummet, as each year 100’s of millions more ounces of silver are used/consumed than are mined out of the ground.

We also have anecdotal evidence strongly suggesting that silver inventories are already stretched to the breaking point. Outspoken silver-bull Eric Sprott has revealed that silver he has purchased for his Sprott Physical Silver Trust wasn’t even refined until after he had purchased it (and waited many weeks to take delivery).

Seemingly, a bullion-default in the silver market would/will be a very straightforward event. Some day soon (perhaps tomorrow?), we will have an old-fashioned “failure to deliver”. Some large buyer of physical bullion will buy and pay for his order, and even after bankster-stalling; the bullion banks will not be able to scrounge-up enough newly-refined bars to meet that demand.
However, in our fraudulent/convoluted markets things are rarely as simple as they appear to be; and this is certainly true with the especially flagrant manipulation of gold and silver markets. The complexity of the dynamics become more apparent when we examine the gold market, where the existence of large stockpiles make a formal failure to deliver a much more unlikely event.
If a gold-default would not occur from an official failure to deliver, what other default-like event could occur as these fraudulent markets finally, inevitably rupture? To answer that question requires taking a closer look at the real, physical bullion market versus the fantasy world of the banksters’ paper-bullion market.

We begin with the revelation of outspoken bullion-basher and head of the CPM Group: ex-Goldman Sachs banker Jeffrey Christian. In testifying before the CFTC, Christian blurted out what had previously been kept secret by the bullion banks: total “leverage” in the bullion market is somewhere at/above 100:1.

In other words, the total size of the “bullion market” exceeds the amount of actual, bullion being traded in these markets by a factor of one hundred. Here it’s important that readers have a more precise understanding of the nature of that leverage. It is not direct leverage. That is, it’s not a simple case of the bankers leveraging bullion positions in the paper futures market by 100:1.
Rather, the vast majority of this leverage exists in the previously-mentioned derivatives casino; where the manipulative bullion banks have permanent, gigantic, and ever-growing bets that bullion prices will decline. Much like the banksters have used their gigantic (multi-trillion dollar) bets in credit default swaps market to manipulate European debt markets – and bankrupt Europe’s governments – the banksters have done much the same in bullion markets with their derivatives bets.

There is, however, one enormous difference between the 100% paper debt markets and bullion markets. The bullion markets require physical bullion to settle all trades where buyers insist on taking delivery, and (as previously mentioned) the long-term consequence of under-pricing bullion is the collapse (to zero) of bullion inventories.

If large gold stockpiles mean that a formal default in bullion-trading could likely be forestalled for a considerable period of time, what other default-like event could detonate the bankers’ fraudulent paradigm of 100:1 leverage? In a word, “decoupling”. In Part II, I’ll explain this concept in detail, and analyze the dynamics which could lead to this event.