What's That Ripping Sound? The Link Between Physical And "Paper" Gold Is Breaking Down - Granite Grok

What’s That Ripping Sound? The Link Between Physical And “Paper” Gold Is Breaking Down

The Gold markets are melting down
The Gold markets are melting down
A few weeks ago, I wrote that central bankers appeared to be manipulating the price of gold to cover up the devaluation of fiat currencies by their incessant printing.

We noted that, as far back as 1998, Greenspan had said that “Central Banks stand ready to lease gold in increasing quantities should the price rise”. And indeed they have done so, leasing out some portion of their reserves to “bullion banks”, who then proceed to sell gold (certificates) while investing the proceeds in something “safe” like US Treasuries.

Fractional gold works until investors demand their metal! (TheAmericanDreamFilm.com)
Fractional gold works until investors demand their metal! (TheAmericanDreamFilm.com)
This practice can be nicely profitable, and allows the creation of Exchange Traded Funds (ETFs) in gold, but it results in the creation of a “fractional gold” banking system, where the amount of gold certificates circulating is several times the amount of gold in the vaults.

Afraid that too many individuals and organizations were hoarding gold, the Fed and friends (IE Goldm.. Sucks) sold gold certificates short, causing a sharp drop in the price, exacerbated by a scramble by those who had bought gold ETFs (GLD) on margin to get out before they were wiped out.

What the bankers hoped for was to scare people out of physical gold, thinking that investors hoping to profit from the rising price would be discouraged by its fall. What they didn’t reckon with was that the people holding physical gold are not so much worried about short term price fluctuations as about the eventual destruction of fiat currencies, like the Dollar. And so, what they got was a massive surge in physical gold and silver purchases all round the world – coins, bars, jewelery – anything which people could carry away and stash!

Gold and silver dealers around the world are reporting massive buying by individuals taking advantage of the price dip: The US Mint has reported record numbers of Gold Eagles being bought, The Royal Mint reported gold coin sales had tripled, dealers in Japan, HongKong, India and Australia report being ‘besieged’ by purchasers, jewelery sales are going gangbusters where coins and bars are in short supply, and China is still buying all the gold they can get. When this news escapes from the financial tip sheets into a political site like Townhall.com, you know that something serious is going on.

Unfortunately, all this buying of actual physical gold is causing the one thing the bankers truly fear – it is depleting their remaining reserves (the fraction which is not leased out), and dramatically increasing the chance that one or more bullion banks, and even the Federal Reserve Bank of New York, might actually default on a request for delivery of physical gold by a registered owner (as opposed to investors holding those silly GLD ETF certificates). Big investors and mega-rich families are beginning to demand actual delivery of their gold from bank vaults, scared that the vault might be bare if they wait too long. You can see how this could easily turn into a run on first the bullion banks, and then the central banks, who, in the last resort will simply default, and offer yet more fiat money in place of the gold which they were committed to deliver.

Can’t happen, you say? The stories are already trickling in: JP Morgan’s gold eligible for delivery has shrunk to almost nothing; total COMEX gold holdings are down sharply; ABN Amro ceased offering delivery on its gold investment accounts, and offers cash instead (technically a default); The London Bullion Market Association (LBMA) is technically in default, where a very large investor asked for his gold, and was given fiat money instead; rich families are telling their private bankers to cough up the gold or have all their other investments moved to a competitor….

In my earlier piece on fractional gold, I said:

THEN, the Germans, who like a hard currency, decided to repatriate 373 tonnes from Paris and 300 tonnes from New York.

This time, it wasn’t just s stray feline [escaping the burlap container] – the stable doors were left flapping in the wind as the stallions galloped for the horizon. (I think there were four of them!) Why? Because the Fed told the Bundesbank that it would take SEVEN YEARS to deliver all of it – is Ben mining it by hand?

I was WRONG! That little gem about Germany and the Federal Reserve Bank of New York was only PART of the story – look at this from Michael Snyder of Economic Collapse Blog, writing at Zerohedge.com:

Regarding the Bundesbank/Fed situation, recall that the Bundesbank asked to have some portion of its gold sitting – supposedly – in the NY Fed vault in NYC sent back Germany. The total amount is 1800 tonnes. After behind the scenes negotiations, the Fed agreed to ship 300 tonnes back over seven years. To this day, the time required for that shipment has never been explained.

So, a German banker walks into the NY Fed and says I’d like my 1800 tonnes of gold NOW, please, and the best the Fed can do is 1/6th of it over SEVEN years!?! How is this not an international incident? Imagine if we sank a German freighter with 1500 tonnes of gold on board – wouldn’t that be an act of war? How about if we just, ahem, borrow, it for a few years, without permission?

Gold and silver coins and bars are now commanding premiums over the spot price, indicating both a shortage and a distrust of the spot prices. Merchants in the Middle East are hiding their stocks of bullion in the hopes of a higher price later – the Velcro which holds the price of ‘paper’ gold on the exchanges to the price of gold on the street is under tremendous strain, and the ripping sound is getting louder. If there’s roughly five times more gold certificates/contracts than physical metal, then gold *could* jump dramatically when reality finally sinks in.

Oh he’s just a silly perma-bear, you say – collapse isn’t around the corner, and Bernanke won’t let the dollar collapse. I’m not predicting when, OR offering investment advice, I’m just collecting the increasingly obvious signs of stress as the bankers print more and more money to satisfy their political masters. It CAN’T end well – we just don’t know when the crack in confidence will become a crisis. (And let us pray that it isn’t Obama in charge to ensure the crisis doesn’t go to waste!)