Sunday, September 23, 2012

Fake gold hits NYC

The initial reaction to news of fake, tungsten-filled gold bars for most people is one of trepidation--and a market sell-off would not be surprising.  I blogged about counterfeit gold bars showing up in the UK and German assayers <here> and <here> a couple years ago, and the media outlets treated fake gold bars as they would authentic gold bars--with scorn.

However, upon further reflection, the truth of the matter is this:  the actual amount of gold in vaults, both private and official, is smaller than expected, probably MUCH smaller.  Given that assumption (it's actually not just an assumption, since by definition, counterfeit gold bars signal someone or someone's thought they possessed real gold, and discovered they had very little), expect turmoil and volatility within the precious metals complex going forward.

The LBMA is the only source of "good bars" of gold, and even top experts can be fooled by counterfeit gold bars.  With a backdrop of counterfeit gold bars, and even good bars that quite possibly have been re-hypothecated, the unofficial and official inventory of gold is probably vastly overstated.

By extension, when supply is shorter than expected, what conclusion does one come up with regarding price of said "commodity"?  The big bullion banks have allegedly been running a version of a Ponzi scheme by manipulating and suppressing the prices of precious metals for years, if not decades.  Their persistent naked and concentrated short positions have artificially knocked down the prices of gold and silver, rendering economic mining of said metals uneconomic.  This only further constrains the supply side of the equation.  Again, what are the implications on price?

Eventually, the manipulators of the paper exchanges will get overrun by demand for physical metal.  The big shorts will be unable to stem the tide because demand from emerging market central banks and citizens will overwhelm the short-term shenanigans.  When inventory of the metals dissipates, physical prices will soar due to delivery only going to the highest bidders.

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