3The Firecracker Report physical gold. As we have reported before, physical gold is a surprisingly scarce asset.According toNational Geographic magazine
,“In all of history, only 161,000 tons of gold
have been mined, barely enough to fill two Olympic-
size swimming pools”.
Now we admit that we do not have absolute hard evidence to prove a shortage of physicalbullion, however we would like to point our readers to the following observations:1.
First as anyone who has bought gold coins or bars knows that there is a severeshortage in the market and one has to wait at least 2-3 months to receive delivery.In addition certain coins are often not available as evidenced by the severalinstances when the U.S. mint suspended sale of gold coins.
2.
Second is the news that gold futures market participants have begun demandingphysical bullion at settlement instead of cash, causing the futures contract sellers toget squeezed since they did not have the physical bullion to make a delivery. OnOctober 9, 2009 Rob Kirby of Kirby Analytics wrote in an article titled
that “Impeccably reliable sources have informed me
that as recently as Sept. 30, 2009
–
the last possible day of trade in the Sept. 09gold futures
–
a number of well-
heeled market participants “bought” substantial
tonnage worth of gold futures on the London Bullion Market (LBMA) and immediatelytold their counterparties they wanted to take instantaneous delivery of theunderlying physical bullion.The unexpected immediate demand for substantial tonnage of gold bullion createdutter panic in at least two banks who were counterparties to this trade
–
J.P. MorganChase and Deutsche Bank
–
because they simply did not possess the gold bullionwhich they had sold short (an illegal act which in trading parlance is referred to as a
“naked short”)
. A (cash) premium of as much as spot plus 25 % (that would be$1,250
–
1,300 per ounce of gold) was offered to settle this matter in fiat money
instead of the embarrassment of a very public “failure to deliver” on the part of the
London Bullion Market Association.3.
Adrian Douglas of Market Force Analysis provides a deeper perspective on this issuein his must read October newsletter titled
. He points to the fact that the gold paper derivative market(cash settlement) dwarfs the underlying physical bullion market, so much so that if all the paper derivatives players suddenly demanded physical settlement the marketwould break down as there is simply not enough bullion to go around.4.
Central banks all around the world spooked by the dollar‟s decline and Bernanke‟s
money printing are desperately trying to diversify their reserves. Now if you are aCentral Bank that holds dollars, what can you diversify into? Currencies such asEuros and Yen are obvious answers but there is a caveat. First there are simply notenough Euros or Yen to go around. Second if every central bank began buying Eurosor Yen, the European and Japanese economies which are heavily export dependent,would come tumbling down as their currencies appreciate. So there are bound to bepolitical pressures against foreign central banks pursuing this line of diversification
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