'The central banks' gold is
likely gone, and the bullion banks that sold it have no realistic
chance of getting it back,' Eric Sprott tells us.
He
also says that these 'bullion bank' intermediaries are probably
turning around and selling their gold to China.
China,
by the way, is the mostly likely catalyst to set off the 'zero
hour'scenario
we told you about yesterday.
We've
chronicled China's ongoing gold grab here at Agora Financial - going
all the way back to April 24, 2009, when the People's Bank of China
announced its gold reserves
had grown to 1,054 tonnes - up from 600 in 2003. And that's the last
official word.
Then
there's private-sector demand in China.
The government is equally opaque on this score. But we do get regular
figures on Chinese imports via Hong Kong. Last year, they totaled a
staggering 834.5 tonnes. And remember, that's in a market that
produces only 3,700 tonnes a year!
Couple
those imports with Chinese mine production - and the total amount of
gold known to be inside China has doubled in a mere three years.
Then
there are the voluminous statements by Chinese public officials best
taken at face value...
- China's gold reserve is 'too small', says the Department of International Economic Affairs of Ministry
- 'No asset is safe now,' says the head of the People's Bank of China's research bureau. 'The only choice to hedge risks is to hold hard currency - gold.'
- And maybe most telling for our purposes: 'The U.S. and Europe have always suppressed the rising price of gold,' according to a commentary in the Shijie Xinwenbao newspaper, duly noted by U.S. diplomats in cables exposed by WikiLeaks.
Echoing
a theme we first wrote about in The
Demise of the Dollar (John
Wiley & Sons, 2005), 'suppressing
the price of gold,' the
article went on, 'is
very beneficial for the U.S. in maintaining the U.S. dollar's role as
the international reserve currency. China's increased gold reserves
will thus act as a model and lead other countries toward reserving
more gold. Large gold reserves are also beneficial in promoting the
internationalization of the renminbi.'
The
plot thickens: 'In
2009,' says Outstanding
Investments editor
Byron King, 'a
high-ranking government adviser let slip that a special government
task force recommended increasing China's gold reserves to a
staggering 10,000 tonnes.'
What's
more, 'word
is already starting to leak out in Chinese newspapers that government
officials intend to make the renminbi 'fully convertible' by 2015' -
that is, able to be freely exchanged for other currencies.
Put
it all together and the picture becomes clear: China
aims to grow its gold stash tenfold
to bolster the renminbi's credibility in only two more years.
We
come back to Mr. Sprott's question: 'So where's the gold coming
from?'
Germany Has to Wait 7 Years for Its Gold... Make Sure You Have Yours Now
In
January, Germany's central
bank posed
the same question. It made plans to repatriate much of its gold
stash -
heretofore kept in France and America, the better to keep it out of
the Soviets' hands in case the Cold War ever turned hot.
The
process of moving 674 tonnes back to Germany is scheduled to
take...seven years.
Not
the sort of time frame that should make you feel warm and fuzzy about
how much of the U.S. and French reserves are actual gold - or 'gold
receivables'.
Which
brings us back to zero hour in the gold
market.
On any given day, the amount of physical gold that's traded around
the world is dwarfed by 'paper gold' - mostly futures. In the
estimation of experts like our friend Egon von Greyerz of Gold
Switzerland and Hong Kong-based hedge fund manager William Kaye, the
ratio is 100-to-1.
Up
until now, the ratio has posed no problem. Most people trading
gold futures
are in it for a short-term gain. But a few people always want to take
delivery of actual metal. At zero hour, 'what
happens is someday some guy or country wants to buy gold, and it's
not going to be available,' says
Eric Sprott.
The
Comex can't deliver... and offers up a cash settlement instead.
'When
does the last bar disappear and somebody fess up? We trade all this
paper gold, but we now know there's nothing behind it, because you
can't get delivery.' The
timing is impossible to pinpoint... but 'we're
living sort of hand to mouth already,' Sprott
warns. 'So
it could be quite imminent.'
When
the day arrives, you don't want to be holding paper gold - and that
includes exchange-traded funds like GLD. As we've pointed out before,
the ETFs are subject to 'counterparty risk' - the risk that whomever
you're doing business with won't, or can't, live up to their
promises. Just like futures.
When
zero hour comes, GLD's price will do what it's always done - track
the Comex price
of gold.
Meanwhile, real physical gold in your possession will break away from
that price... and you'll be glad you have it.
While
Mr. Sprott hesitates to put numbers to his forecast, we can perform a
little napkin math. If the Comex price is US$1,800, experience from
2008-09 shows that a Gold Eagle on eBay might go for a 30% premium -
that's US$2,340! If panic takes over the Comex and the price rises to
US$2,000, real metal in your hand will be worth US$2,600.
As
the old commercial said, 'Accept no substitutes'. Own physical gold.
Regards,
Addison
Wiggin
for The Daily Reckoning Australia
for The Daily Reckoning Australia
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