Skip to comments.The “Zero Hour” Scenario (Default On Precious Metals)
Posted on 03/10/2013 9:40:58 AM PDT by blam
The Zero Hour Scenario
By Addison Wiggin
Possession is nine-tenths of the law from a Scottish expression
Its a Sunday night. October 2013. Parents are making sure the kids homework is done. Football fans are settling in for the nights NFL matchup. Reigning champs, Baltimore, are about to lose.
And all hell is breaking loose in the precious metals markets.
Moments before electronic trading opened at 6 p.m. EDT, Commodity Exchange Inc. the Comex announced it would settle a large gold contract in cash and not gold. To be blunt about it, the Comex has defaulted on its contract. Suddenly, everyone else with a gold contract or a silver contract started to wonder if theyd be next to get stiffed.
Gold, which ended that autumn week at $1,715 an ounce, starts gyrating wildly but mostly up. By Monday morning, its up past $1,800.
But good luck trying to get that price or anything near it at a coin shop or online dealer. Under normal circumstances, a $1,800 spot gold price would mean U.S. Gold Eagles around $1,890 a 5% premium. But on this day, buyers desperate to get their hands on actual, physical metal because trust in the system is breaking down have driven the price far above $2,000.
This is zero hour the day you can mark on a calendar when the price of real metal breaks away forever from the quoted price on CNBCs ticker. Its the day youll be grateful you hold real metal and not a proxy like the GLD exchange-traded fund (ETF).
Sound far-fetched? Today, well show you why its inevitable
The Emperors New Clothes: Why Now Is the Worst Time to Give up on Gold
The zero hour scenario is the ultimate emperor-has-no-clothes moment.
Hans Christian Andersens original 19th-century tale The Emperors New Clothes has become a 20th- and 21st-century touchstone for obvious truths overlooked by the masses. It is almost a cliche. But it is singularly appropriate for our purposes today.
The emperor here consists of central banks, commercial and investment banks and the commodities exchanges. The day everyone recognizes them as being buck naked or in this case, stripped of the gold they claim to hold will be zero hour. Its the day youll be happy you held on, even as gold sank from $1,900 in September 2011 to less than $1,600 as we go to press.
You did hold on, didnt you?
Well, you can buy the dip, at least.
Caution: What we are projecting here is nearly the ultimate in fat-tail events. It is the product of deep research by one of the gold markets most plugged-in luminaries plus our own informed speculation.
But make no mistake: Zero hour in the form of a precious metals default on the Comex, or maybe the London Bullion Market Association (LBMA) is coming sooner or later.
The odds of it happening are about 100%, says Eric Sprott.
Mr. Sprott oversees $10 billion within the Canadian asset-management giant that bears his name. Among those assets is the Sprott Physical Gold Trust (PHYS) our recommended vehicle if you choose to keep a portion of your gold holdings in a brokerage account.
To understand why its a certainty is to go deep down the rabbit hole into the vaults of the worlds central banks. Sit tight
12 Years and Counting: Demand Runs Away From Supply
We dont want to make it sound more complicated than it is. At root, zero hour will come when everyone knows gold supply can no longer meet gold demand.
When I look at the physical data that I can see in gold, Sprott told us in a recent interview, the gold market has not changed its supply fundamentals in 12 years. Its flat. Add up supply from new mines and recycled scrap gold mostly old jewelry and the World Gold Council reckons its rock-steady at about 3,700 tonnes (metric tons) per year.
And what about demand? Since gold began its bull run in 2000, scads of new demand sources have come into the picture.
* Central banks, which were net sellers of gold in the 80s and 90s, became net buyers
* Exchange-traded funds like GLD and trusts like PHYS didnt even exist before 2004
* Annual sales of gold coins by the U.S. and Canadian Mints have grown fourfold
* Chinese consumption of gold has nearly quadrupled
* Indian consumption (measured by imports) has grown 30% from an already high level.
The mere combination of only five separate sources of demand, Sprott writes in a recent white paper, results in a 2,268-tonne net change in physical demand for gold over the past 12 years meaning that there is roughly 2,268 tonnes of new annual demand today that didnt exist 12 years ago, when supply and demand were more or less in balance.
And those are only the official figures. There are lots of other purchasers of gold that I dont have records of, he elaborated in our interview.
So for example, when somebody physically buys a gold bar, whether its [hedge fund manager] David Einhorn or the University of Texas endowment or someone like that, theres no place that I can go and see how many bars were purchased. Theres no public documentation if Russian billionaires are buying gold. For every story that makes the news, like Einhorn or UT, there might be 10 purchases that occur sub rosa.
Summing up, nearly 2,300 tonnes (officially) of new demand each year are coming into a market where supply is still stuck at roughly 3,700 tonnes. So wheres the gold coming from? Mr. Sprott asks rhetorically. Whos supplying this gold?
After a research project thats gone on as long as the bull market in gold, hes left with only one plausible explanation the one that makes default on a major commodity exchange inevitable.
The Western central banks, he tells us, are surreptitiously supplying gold by leasing theirs out.
The Central Banks Shell Game in Gold: Its Here No, Its Here
Wait a minute, youre asking. You just said central banks became net buyers of gold in the last decade.
True but all the buying has come from developing countries like Russia, China, India and Kazakhstan.
Meanwhile, the numbers from the big developed countries the U.S. included have been static.
Remember the main reason central banks are in business to benefit their biggest and most powerful member banks.
And whats beneficial to U.S. and European banks is gold leasing. Commercial and investment banks lease gold from a central bank at bargain rates usually less than 1% a year. Then they sell that gold into the private market and plow the proceeds into well, anything that yields more than 1%. Its a sweet deal if youre a banker.
But then the gold is gone, right? Yes. If the central bank wants its gold back from the commercial and investment banks, those banks would have to buy gold on the open market driving up the price. Thats a bad deal if youre a banker.
So usually, theres a tacit understanding: Central banks dont ask for their gold back, and the commercial and investment banks roll over their gold leases. As long as theyre earning more than 1%, the debt service is easy peasy.
But if a central bank asks for its gold back, its game over.
They can get away with [the leasing], Sprott explains, because on their financial statements, the one line they have for gold says gold and gold receivables. A receivable is not real gold, physical gold and we dont get a breakdown between the receivables and the physical. Theyve not provided that.
Look below and you can see the guile central bankers use to concede their gold holdings is not limited to bars in a vault.
It would not lend much credence to central bank credibility, Sprott writes, if they admitted they were leasing their gold reserves to bullion bank intermediaries who were then turning around and selling their gold to China, for example.
But the numbers strongly suggest that that is exactly what has happened. The central banks gold is likely gone, and the bullion banks that sold it have no realistic chance of getting it back.
Add it all up and were getting much closer to zero hour.
No economist am I but previously in investing these types of articles are published just as a major broker is getting a huge sell order and needs to place it.
"Every year, major banks and brokerage houses provide their four-year forecasts for the gold price. The following chart documents the average price projection of 25 top analysts over the past seven years, many of whom specialize in the resource industry. I might suggest pushing away from your desk so that when your jaw drops it doesnt hit the keyboard.
If I were a buyer of Gold, I’d insist on NOTHING but physical possession of it. Buying the so called ‘paper’ would be unthinkable to me. If security of my physical possession is a concern, that’s what safes are for. One can always rent a ‘deposit box’ at the bank as well, but I’d prefer a nice big(at least 1,000lbs) fire-rated safe, bolted to my basement floor to store things in.
That’s why you want to own mining stocks. You can get dividends now, and will be leveraged when TSHTF.
Don’t go crazy on them, no more than 3% of your portfolio in any one stock or 10 to 15 % in the sector depending on your risk tolerance. The sector ETF is GDX, which pays about a 1.24% dividend, and it’s currently a falling knife, so this not for the faint of heart. Use stop losses or options so you don’t get sliced up too badly.
Investing is about patience and judgment, because the market will always be one step ahead of you.
(It has nothing to do with the Italian automobile manufacturer, FIAT, which many say due to its poor workmanship is an acronym for, Fix It Again, Tony .)
and when the government then demands that you turn in all your gold to them and makes it illegal to own gold (this was done before)... what are you going to do then?
face it... when the end comes... there is no way to escape and no right answer.
I would say that the Germans trying to get their gold back from New York have provoked a de facto default. The most obvious explanation as to why would it take seven (?) years to move many things each the size of a brick from point A to point B is that they just don't have them right now. Any security concerns offered as reasons not to move it in a timely matter, despite the matter of that diamond heist in Brussels in February, are simply red herrings.
And there is precedent. When nickel officially defaulted in 2006, the criminals at COMEX (aka CRIMEX) simply said, eh, ok, sellers pay buyers one percent per day until they can deliver. You can bet that gold would be going up more than one percent per day in that scenario, and CRIMEX wins again.
“...and when the government then demands that you turn in all your gold to them and makes it illegal to own gold (this was done before)...what are you going to do then?”
Shoot first, ask questions later. :)
P.S. A TEXAN is asking this and a YANKEE has to answer? LOL! ;)
I will relate this story again for the benefit of my FRiends...
A friend of mine took possession of physical PMs...a lot of PMs.
One fine morning her husband walked into the garage and was met by a man in a ski mask with a pistol.
If her husband had not been an incredibly brave and strong 70 year old man, they would both have been dead after the obligatory torture session.
As it turned out, both hubbie and she were badly bloodied but alive as the robber escaped dropping his mask and zip ties as he fled.
The robber looked like an absolutely normal white guy like you would see shopping at Wallymart. No tats, piercings, etc.
The robber was never caught.
My friend had not told anyone that she had PMs. Who knew? The coin shop? The UPS driver?
Remember OPSEC at all times. Do not keep PMs in your gunsafe, home, or other obvious place.
Bank safes aren’t that reliable. If the gov’t is in desperate need of gold, they can make the banks deny access or inspection to safe deposit boxes belonging to “the subjects”.
Yes, the Germany deal is what I was thinking about. Looked like a default to me.
And you can't trust bank safety deposit boxes, either, as any run on the bank will also block access to your box.
So what is the answer? Get creative with your home remodeling.
and use a P.O. box. You should not have valuable items mailed to your home address.
Not investment advice, but the stop-loss order often goes under everyone's radar screen. You can't use them with Mutual Funds, they are not available with that instrument.
With ETF's trading "Intra-Day" if the SDHTF and the markets have a huge correction in one day ( a la Sept 08') and you hit you exit number, you are in Schaffer City....
why don't you define it for us; it would make your story so much more interesting.
I'm of the believe that probably 75% of 'OPSEC' is people keeping their damn mouths shut, and preventing outside knowledge of what you have.
Why would anyone pay the spot price for 1oz of pure gold (99.99%) for a 1oz coin coin that is only 91.6% gold?
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