BUCKLE UP: Greyerz Says Swiss Refiners Confirm Supply Of Silver Is Now Extremely Tight

https://kingworldnews.com/greyerz-swiss-refiners-confirm-supply-of-silver-is-now-extremely-tight/

Two Mines Supply Half Of U.S. Silver Production & The Real Cost To Produce Silver

https://srsroccoreport.com/two-mines-supply-half-of-u-s-silver-production-the-real-cost-to-produce-silver/

Is the Supply of Gold Depleting?

http://www.goldtelegraph.com/is-the-supply-of-gold-depleting/

Gold futures hiccup indicates demand outpacing supply

Mainstream financial media outlet Reuters is going rogue, touting the shortage of physical gold.  lol

http://www.reuters.com/article/2013/07/19/derivatives-gold-idUSL1N0FP1CB20130719

The New Law of Supply and Demand

http://www.silverseek.com/commentary/new-law-supply-and-demand-12264

Despite soaring demand for physical precious metals, supply is constrained

The world will run out of physical gold and silver.  Here's some evidence, some coming from obscure news sources, as the mainstream media is not covering these events.

Barrick, the world's biggest gold miner, has their biggest mine being shut down in Chile.
http://www.trefis.com/stock/abx/articles/189839/barrick-golds-crucial-mega-mine-may-be-delayed-at-least-by-one-year/2013-06-04

Freeport McMoran operates the Grasberg mine in Indonesia, which has the world's largest gold reserves.  It is also shut down for up to a year.  Notice how the article focuses on copper--and not gold.
http://www.bloomberg.com/news/2013-06-04/copper-rises-on-supply-concern-as-second-biggest-mine-stays-shut.html

And finally Rio Tinto's Bingham Canyon mine is America's largest silver supplier, as well as a significant miner of gold, is also shut down.  Again, they mention copper, but not a peep about silver.
http://www.reuters.com/article/2013/04/12/rio-utah-slide-idUSL2N0CZ1EO20130412

I've blogged about soaring demand for physical gold and silver.  It's being reported in the major financial media outlets now.  Now I'm blogging about dwindling supply.  Usually, when a price of a commodity rises, like gold has risen from $250 to $1400 in the last decade, more supply is brought into the marketplace, as producers with a profit motive capitalize on higher prices.  Then, as supply increases, prices taper off.  It's one of the universal laws of supply and demand balancing themselves out.

THAT HAS NOT HAPPENED with gold!  Production has flat-lined, on averaging rising 1% a year, despite soaring demand from central banks, sovereign wealth funds, jewelry, investors, and in the case of silver, industrial demand also.  Instead of prices rising in the last two years, prices have declined.  This price manipulation/suppression will not last, because economic laws will eventually win out, much like gravity dictates how fast a Newtonian apple falls to earth.  It can be temporarily propped up, but remove the props and the apple resumes its acceleration.

The stresses in the physical market are showing up in the vaults of JPMorgan, the COMEX, and the US Treasury.  Readers need to educate themselves on the difference between COMEX "registered" and "eligible" inventory.

Quickly, registered is inventory set aside for physical delivery of COMEX bars to longs (owners of futures contracts).  Eligible is client inventory kept inside the vaults--they are essentially "untouchable".  However, if you look at the chart in the article below, JPMorgan was shuffling eligible inventory toward the registered category just to meet delivery demands (typically, only 1% of longs demand delivery--the other 99% are dumb and happy to receive cash settlement--or roll over their contracts to future months).  This is a form of re-hypothecation--or multiple pledging of the same inventory.  It's theft (Google Jon Corzine and how he robbed clients before MF Global collapsed).

JPMorgan, a custodian bullion bank, is running low on physical inventory.  By extension, the COMEX is also running low on inventory of physical precious metals, and could potentially default when longs demand delivery in the future.  This could happen soon at current depletion rates. But given these bullion banks are clever and will find ways to shake the trees to scare more longs out of their positions (using the GLD and SLV ETF's as another set of naked shorting tools), I believe the end of year rush to buy metals will cause the default--the so-called "force majeure" declaration.  They'll simply run out, throw up their hands, and say we couldn't help it--it was an act of God, much like a weather disaster.

And when that happens, if you're a long looking to take physical delivery, good luck on suing them with your legal claims.  This chilling disclaimer was inserted yesterday in the COMEX daily report:

“The information in this report is taken from sources believed to be reliable; however, the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness.  This report is produced for information purposes only.”

That looks rather benign, but could you imagine if your bank inserted a similar footnote in your monthly statements, and declared:

"The information in your account statement is taken from sources believed to be reliable; however, Bank of (fill in the blank) disclaims all liability whatsoever with regard to its accuracy or completeness.  This statement is produced for information purposes only."

If you received that statement, you would run to the bank and withdraw all your funds yesterday.

This is the smoking gun.  It is an open declaration that their inventory reports are suspect, and the assets clients think they legally own will be settled in whatever means the COMEX wishes to settle it.  In lieu of physical delivery of bars, longs will receive cash instead.  The COMEX is preparing for the run on physical gold and silver from which they won't be able to deliver, and this disclaimer preempts any lawsuits due to non-delivery.

http://www.zerohedge.com/news/2013-06-04/jpm-comex-gold-slides-new-all-time-low

 

My conclusion:  GET PHYSICAL GOLD AND SILVER.  Do not mess with ETF's, futures contracts, certificates, etc.  More importantly, the existing and intensifying shortage is strongly bullish for gold and silver's fundamentals.  Ignore the daily gyrations and fluctuations--it's all noise.  Just accumulate, and BTFD when the opportunities arise.

This is not an investment.  Physical gold and silver do not pay dividends--there is no return on investment.  In fact, it costs money to store and secure them.  But treat precious metals as part of your savings--outside the increasingly corrupt and fragile banking system.  The window is closing.

Biggest Gold Mine In The World Shutdown: Is This The Catalyst Gold Has Been Awaiting?

http://seekingalpha.com/article/1476581-biggest-gold-mine-in-the-world-shutdown-is-this-the-catalyst-gold-has-been-awaiting

Gold Supply and Demand Dynamics and the Potential Dollar Endgame

http://www.bullioninternational.com/blog/entry/gold_supply_and_demand_dynamics_and_the_potential_dollar_endgame

Global silver supply and demand

Click on image to enlarge.

I blogged about the US Mint depleting their inventory of Gold Buffalo coins a couple days ago:

http://gregnguyen.blogspot.com/2010/09/us-mint-has-run-out-on-buffalo-gold.html

Last month, they had depleted their inventory of the more popular Gold Eagle coins.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKIgT9DddcYY

The Silver Gold Eagle coins have at times been sold out as well. This is not supposed to happen when an asset is in the throes of a long-running bull market. Higher prices should invite more production.

For instance, if wheat prices soar (like they have been due to drought in Russia), more farmers will allocate their acreage to production of wheat in order to increase profits, eventually bringing prices down to equilibrium. Gold was priced at $35 an ounce until President Nixon took us off the gold standard in 1971. It is now priced at approximately $1300. A much higher price should yield much higher production, as mining companies are motivated to produce higher quantities at inflated prices.

The problem is that an increase in supply has not accompanied gold's price increase, because there is no easy gold to find. Miners have to look far and wide for new deposits, and they have to dig deeper to find smaller amounts of gold (lower grade deposits). Higher gold prices have not fueled increased supply, despite incentive to increase production. Simply put, there is not enough supply to meet increased invesstment demand. Extrapolate that scenario out as you must.

Contrarian natural gas call

http://www.theglobeandmail.com/globe-investor/investment-ideas/features/taking-stock/a-contrarian-makes-another-call-this-time-natural-gas/article1538686/

Disclosure: long shares of natural gas pipeline MLP's

The law of big numbers

As an engineering student, I understood the concepts of linear growth vs. exponential growth. But even I underestimated the practical applications of calculating exponential growth when it comes to energy consumption. Here's a primer on exponential growth and the future impact it will have in our consumption habits in a world of finite natural resources.



Lesson learned? Demand for energy, base metals, commodities, and precious metals will continue to outstrip supply, as world population and the standard of living in emerging countries grow. I'll let readers come up with their own conclusions.

John Embry on gold

John Embry of Sprott Asset Management on the supply/demand dynamics of gold:

http://www.sprott.com/Docs/InvestorsDigest/2009/12_24_2009%20Gold%20bull%20has%20many%20years,%20thousands%20of%20dollars%20to%20go.pdf

Precious metals as an asset class

Relative to other asset classes, the gold and silver sectors are minuscule. If and when precious metals and resource mining companies become popular, the rush into these tiny sectors will drive up prices, as supply won't be able to keep up with demand.

http://dailyreckoning.com/how-to-invest-in-gold-mania/

Disclosure: long gold and silver mining shares.

Natural Gas and Contrarian investing

Remember when I bought natural gas a couple weeks ago--mainly because NO ONE liked that sector, even the CEO's of natural gas companies, who should be the industry's biggest cheerleaders?

Well, guess what--natural gas company shares have exploded, up over 30% in certain cases. My mutual fund purchase is up 25%, and ATN has more than doubled, a triple-digit bagger.

Logic? The world is awash with natural gas supply, due to demand destruction from a worldwide economic downturn. Natural gas prices surely must decline further, right?

Well, the reason that conventional logic doesn't work as an investment thesis is because markets are not always rational, and when they are rational, they tend to become over-extended and distorted.

But let's examine this scenario further before we declare the madness of markets. If the cost of producing natural gas is $4.00 per British thermal unit, and the market price is $3.50, companies will eventually shut down natural gas wells, in order to suspend losses with each delivery. They have done exactly that, as there are now 45% fewer wells. Shutting them down is easier than starting then up again. More on that later.

With capacity reduced, prices eventually will stabilize and rise, as demand recovers and absorbs excess inventory. As prices rise above production cost, natural gas companies will look to dig new wells to increase their profit margins. However, that's not so easy. Starting up a well takes a lot longer than shutting one down--hence a time lag before bringing capacity on-line. With supply no longer able to keep up with increasing demand, prices rise further. That's the typical supply/demand cycle, and astute, but courageous investors need to account for. Perhaps I'm not so crazy after all. The economic laws of supply and demand do work, but not always in the timeframe most investors anticipate.

As a contrarian, you want a consensus to develop--because it's usually a confirmation that the consensus is wrong when it comes to pricing reversals. It's cyclical. The rule of thumb is when there is a 60/40 ratio, follow the trend--the "trend is your friend" is an appropriate slogan. But when the consensus is overwhelming--perhaps 90/10, you better look for the exits, as the overwhelming majority is almost always wrong.

With natural gas, the selling pressure has been so intense since mid-2008, that the number of sellers has been exhausted--the market ran out of sellers. Prices had to bottom. I follow several indicators to monitor investor sentiment, but it's easier said than done. When your social instincts are to chase the latest fad, it's difficult to go against that same crowd, especially when they are well-regarded. But when it comes to predicting inflection points, it's a prerequisite for investing success.

Why I like natural gas

The reason why I believe natural gas prices have reached bottom: because no one else does. That's it--that's my investment thesis. I own some natural gas pipelines for their high dividends, but I bought a natural gas mutual fund in my Fidelity account several weeks ago as a sector rotation play in my IRA.

Most people thought I was crazy, which was reaffirming. But the reason why I dove in? Last month, in an interview with Jim Cramer's Mad Money show on CNBC, the CEO of a natural gas company CEO was so bearish that he could not call a bottom on natural gas prices. I commend him for being an honest CEO (a rare commodity these days), but the fact that someone who should be the biggest cheerleader for his industry was so glum about his company's prospects triggered a buy alert inside of me. He went on and on about demand destruction due to the weakening worldwide economy, exploding inventories, yada yada yada.

But in between the gloom and doom, he also mentioned his company and his peers were closing down wells at record amounts, because gas prices were so low that they were bleeding cash with each drilling. In other words, due to depressed prices, there are now 50% fewer natural gas wells in production. That tells me the supply side of the equation will fix itself eventually, which means prices have to stabilize, if not rise even if demand does not return to previous levels. And if the economy does recover even slightly, prices have to rise more.

I was a couple days early from the exact bottom, but I'll take that any day of the week and twice on Sunday. I actually did the same thing by buying gold stocks in the November lows. NO investor can catch the exact bottom or top of an asset price, but if you are close, you can still capture the majority of the major trend move.

Contango--why this dance is important

Contango is the recent buzzword in trader's vernacular. It's basically the difference between the higher-priced futures contract and the lower-priced spot price of a commodity--like crude oil, for instance. It has recently made headlines due to the plummeting price of oil, causing the spread--or contango--to widen. Hence, big oil companies and financial institutions are taking advantage of that spread, taking immediate delivery of oil at the much lower price, and storing it for sale and future delivery at the higher price (less storage, security, and insurance costs). In doing so, they've basically locked in a guaranteed profit via the contango trade. Fundamentally, a contango exists in normal market conditions, but it's been in the news lately due to its uncommonly wide spread.

But contango's antithesis--backwardation--has quietly made some news in the precious metals market (I glossed over it last month). In a contango, the spot price is lower than the forward futures contract. However, with backwardation, the opposite is true: the spot delivery price is HIGHER than the forward futures contract. How can that be? After all, doesn't taking immediately delivery incur additional inventory costs (as described above)? To answer that, let's perform a quick anatomy on the gold market, and compare it to crude oil.

On December 2, 2008, for the first time in the history of mankind, gold reached backwardation. Gold is predominantly not a consumable asset, but is stored mostly in vaults at central banks, commercial money centers, private banks, etc. Hence, it is almost always in contango. On that date, COMEX spot prices for gold were higher than December gold futures, for December 31 delivery. Backwardation exists because of perceived scarcity, which causes investors to pay a premium for guaranteed delivery. In other words, buyers insist on delivery, instead of cash settlements. By contrast, a contango exists when there is perceived oversupply, which is normally bearish when you consider demand/supply dynamics. For instance, prior to oil's meteoric peak at $147 a barrel, a contango formed, precursing the huge decline to its present levels in the $40's.


Gold, on the other hand, is not consumable, so has been in contango into perpetuity. That is, until December 2nd. Gold's backwardation is the inverse of crude oil's 2008 contango, and subsequent precipitous decline--all you'd have to do is turn the chart upside down. Therefore, backwardation--especially for gold, as it has never occurred before--has the opposite effect—and is extremely bullish for gold. In fact, crude oil had its own backwardation in 2007, foretelling its parabolic run up in price into the summer of 2008. Backwardation reflects scarcity at current price levels, and is an indicator that gold will continue its secular bull market.