Saturday, August 3, 2013

No One Wants Paper-Called-Gold

Jeff Nielson
The stampede out of paper bullion products continues. The largest gold ETF, SPDR Gold Trust (GLD), has seen holdings plummet. Many holders have redeemed for bullion; most have simply been selling.
Meanwhile bullion banks are net long paper gold (expecting a rally?), but are still net short silver, because there has been no flight out of paper silver.
This tells us two things. One—gold and silver markets are totally correlated (where on metal goes, the other must follow), so it makes no sense for bankers to be net long gold and net short silver; they cancel each other out. Two—with all new buyers frightened out of the gold market, there are no buyers for the paper gold being dumped on the market, except bullion banks themselves.
Why are bankers net long gold, yet short silver? Because they weren’t forced to soak up millions of units of their own paper silver.  As investors bailed out of paper gold, bullion banks themselves had to bail in, writes Nielson.
Thus the frantic effort to find investors in Asia (India particularly) for paper gold products. That effort has largely failed. Physical gold imports from China and India alone have spiked to an annualized rate of 4,000 tonnes per year, while the media is reporting sales of some fraction of a tonne of paper gold to Asia over a 3-month period.
Why bother trying to sell paper gold to Asia? Because in the West, the paper gold market has been destroyed. If bullion banks had bought up millions of units of their own paper gold, their funds would have decoupled from the physical gold market, with unit prices falling so far below spot that they would have (at worst) collapsed, or (at best) been exposed as scams.
Precious metals ETFs are designed to get paper gold holders to fund the shorting operations of the bullion banks. Thus, the bullion banks have now lost their funding for their gold shorting practices.
With no takers in Asia for paper gold, bankers have only one option left for finding new paper gold buyers: a rally in the sector, leading to much higher prices.
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