World Changing Events & The Global Run On Gold And Silver

We could see some real fireworks in the markets in the next few weeks.  This past week saw a run on bullion, particularly silver.  We also found out that inventories of gold and silver are dropping precipitously at the well-known bullion repositories, particularly Western central banks and commodity exchanges.

Refiners are severely backlogged, inventories of popular products have been depleted, and premiums on available items have gone up significantly.  Panic buying swept the globe since the coordinated takedown of paper prices for precious metals.  It feels as if we are very close to some sort of resolution with the potential for world changing events.  There is no question that a form of a bank run on gold is occurring all over the world….

It is well known that countries such as Russia, China and those in the Middle East have made strategic allocations in recent years.  Countries who already had gold began to feel increasingly uncomfortable it being held elsewhere for safekeeping.

Venezuela was one of the first movers, but the request by Germany for repatriation of their gold raised eyebrows.  The response given to the Germans about only being able to get 10 percent of their holdings over seven years was unnerving, not only for the Germans but should have been for any other country having concerns about the ability to repatriate their gold.

Prior to Cyprus, virtually everyone thought bank accounts were the primary wealth preservation strategy.  Even if interest rates were close to zero, the bank statement still showed the same number each reporting period as well as any new deposits.  There was universal belief in the sanctity of the concept, particularly for those amounts under the insured umbrella.

As we know, that all changed.  Depositors are really unsecured creditors.  The ability to do a Cyprus-like ‘bail-in’ as it was called has been quietly written into the laws of most of the major countries.  Individuals have gotten the message.  Post-Cyprus, the initial reaction was to move funds to other countries and other currencies.  With bail-in capabilities lying in the wings and countries such as Japan overtly destroying the value of the Yen, individuals are reverting to the wealth protection and preservation asset of the ages, gold and silver.

Cyprus was the wake up call.  The central bank attack on the paper prices was the opportunity.  A great many people took advantage of it.  Scaring people and then giving them a way out at the same time was a terrific recipe for panic buying and shortages.

Wall Street has always looked down on individuals as ‘dumb money’ lacking sophistication.  Trading techniques were even devised to follow the actions of individuals as contrarian signs in the markets.  Those who understand the historic changes in our markets, money and geopolitics are relatively few in number.  They are not the institutions.  In this era, we consider the dumb money to be the institutions managing endowments and the huge pools of mutual and retirement funds.  Their inability to comprehend the changes in what ‘smart money’ would do is a combination of institutional sclerosis and the tyranny of the consultants.

The individuals whose funds are in these pools trust these institutional managers to make smart decisions.  The institutional pools are too big relative to the size of the gold and silver markets to take meaningful positions.  Allocations are driven by the consultants who generally avoid this asset class.

It is frustrating to think that many investors are not taking action to protect themselves, but the truth is that most of them have delegated the decisions to others and are unaware of the issues and the perils to which their savings are exposed.  Most account holders are oblivious and will remain so as long as the stock and bond markets are artificially elevated.  They are also trapped in programs that do not allow for any allocations to gold and silver.

What was interesting about the announcements relating to inventories last week is the matter of fact delivery and reaction on Wall Street and the media.  It felt like “Yes, the metals are almost gone, but so what?”.  Extraordinary!  If and when the metals are depleted, one can only speculate on the huge changes in at least some markets.  There have been predictions that the cash and futures markets will converge for metals.  The metals exchanges would likely function as betting parlors if you strip away the ability to take delivery.

Others have predicted the bypassing of the exchanges by the producers and dealing directly with the buyers.  If we are having a run on the gold and silver by the small percentage of investors at this point, what happens to availability and prices if even a small incremental addition from individuals and institutions occurs?  The bottom line is I believe we are about to find out the answer to that question shortly.