No Takers: $2,000 to sell a gold bar and buy April futures

The WealthCycles Staff

With gold prices dipping under $1,600, savers are rejoicing as getting rid of pesky paper banknotes became all that much better since this past Friday.

One important point to appreciate when enjoying this most recent sale is the distinct shortage in the physical market. A shortage of physical gold for sale means price must rise until the next willing seller appears, whether a gold investor or a recycler.

Gold Price Chart February 15 2013

One market participant, who is not selling gold, is the bullion banks… despite the $2,000 per bar profit available in the market right now (minus delivery charges).

This is because they don’t have the gold to sell. JPMorgan’s secret vault, located underneath 60 Victoria Embankment, in London, is presently being tapped for a 15 Ton Gold Repatriation after the State oil fund of Azerbaijan asked for delivery less than a month ago. Brink’s has delivered one of the 15 tons so far, with the rest to be "gradually transferred."

A bullion bank with gold to sell could sell a 400 troy ounce bar of gold on February 15 at the spot price of $1612.25, and simultaneously buy four April gold contracts, where the gold seller in the contract is obligated to produce a 400 troy ounce bar on that future April delivery date, for $1607.30, a $4.95 profit per troy ounce—back of the napkin—$2,000 a bar.

Obviously mines will sell at “any price,” and mints running out of blanks to coin, along with banks or other institutional traders unable to profit from the gap between current and future prices, can only mean a very tight market for physical precious metals.

One more metric, just to triple-verify physical shortage, is the gold lease rate, published by the London Bullion Market Association (LBMA). The London Bullion Market Association (LBMA) stopped publishing the silver rate in November of 2012 (as one can see below).

The net rate collected when leasing gold (and borrowing dollars) has accelerated swiftly since the 15th, turning positive. This is uncommon, and last occurred during the physical shortages of 2011. The chart shows that the higher prices that occurred later in 2011 enticed suppliers of gold (scrap, investors) to relinquish some stock, as the lease rate fell back below zero.

Gold_Silver_Lease_Rates_2013

There is much gold and silver supply in scrap, silverware, and in investment form. Yet the market shows that none of the thousands of tons contained in Warren Buffet’s hypothetical 20 meter by 20 meter cube are for sale at these prices.

There is a resolution to a market shortage, considering the significant supply of physical gold and silver held in reserve. As COMEX spokespeople would tell you, “price solves everything.” When market shortages push prices up, either:

1) Buyers value gold more highly and thus will offer a higher price.

2) Sellers value their gold more highly and are only willing to part with it at a higher price.

Robert Blumen eloquently closes the piece with the fundamentals of gold, as mainstream media riddles readers with claims of $700 gold, and the 100-year old promise of a fundamental dollar bull market [our emphasis]:

The fundaments of gold are the current purchasing power of money [your national currency]; expectations about the future purchasing power of money [your national currency]; the growth rates of various national money supplies; the volume of bad debts in the system; expected growth rates of bad debts; the attractiveness of other available investments; and the investor’s preference for consumption rather than [saving] / investment. 
These factors do not act directly on the gold price.
Instead, they are focused through the prism of investor preferences, which are not measurable.

Carl Menger, forgotten father of Austrian economics, would tell you that value does not exist outside of the consciousness of man and woman. This means there is no such thing as an inherent value to anything. Value is everywhere and at all moments in the eye of the beholder.

This video will help remind those who save in precious metals of the fact that they are far from alone in deciding that $1,600 is not an appropriate price at which to sell any of their gold:

FOMC minutes provide further opportunity to shake long futures contract holders out, and to accumulate physical for those seeking to save.

A great week!

Great article

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