Guest Post: Gold And The "Zero Hour" Scenario

Tyler Durden's picture

Authored by Addison Wiggin via The Daily Reckoning blog,

It’s a Sunday night. October 2013. Parents are making sure the kids’ homework is done. Football fans are settling in for the night’s 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 they’d 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, it’s 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 CNBC’s ticker. It’s the day you’ll be grateful you hold real metal and not a proxy like the GLD exchange-traded fund (ETF) (NYSE:GLD).

Sound far-fetched? Today, we’ll show you why it’s inevitable…

The Emperor’s 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 Andersen’s original 19th-century tale The Emperor’s 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.” It’s the day you’ll be happy you held on, even as gold sank from $1,900 in September 2011 to less than $1,500 as we go to press.

You did hold on, didn’t 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 market’s 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 (NYSE:PHYS) — our recommended vehicle if you choose to keep a portion of your gold holdings in a brokerage account. To understand why it’s a certainty is to go deep down the rabbit hole… into the vaults of the world’s central banks. Sit tight…

12 Years and Counting: Demand Runs Away From Supply

We don’t 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. It’s flat.” Add up supply from new mines and recycled scrap gold — mostly old jewelry — and the World Gold Council reckons it’s 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 didn’t 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 didn’t exist 12 years ago,” when supply and demand were more or less in balance.

Something's Gotta Give

And those are only the official figures. “There are lots of other purchasers of gold that I don’t have records of,” he elaborated in our interview.

“So for example, when somebody physically buys a gold bar, whether it’s [hedge fund manager] David Einhorn or the University of Texas endowment or someone like that, there’s no place that I can go and see how many bars were purchased. There’s 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 where’s the gold coming from?” Mr. Sprott asks rhetorically. “Who’s supplying this gold?”

After a research project that’s gone on as long as the bull market in gold, he’s 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: “It’s Here… No, It’s Here”

“Wait a minute,” you’re 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 what’s 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%. It’s a sweet deal if you’re 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. That’s a bad deal if you’re a banker.

So usually, there’s a tacit understanding: Central banks don’t ask for their gold back, and the commercial and investment banks roll over their gold leases. As long as they’re earning more than 1%, the debt service is easy peasy.

But if a central bank asks for its gold back, it’s 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 don’t get a breakdown between the receivables and the physical. They’ve 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.

How Western Central Banks Describe the Gold Reserves on Their Books

“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 we’re getting much closer to zero hour.

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kliguy38's picture

its ALREADY settling in cash.....everybody and their brother knows it and are taking delivery of physical 

OutLookingIn's picture

Gold facts from the Census Bureau monthly trade data for 1991 to 2012

Net gold exported at 5,504 tonnes

US mine supply and recycling at 7,532 tonnes

Gold demand at 6,517 tonnes

That leaves only 1,015 tonnes for export.

Where did the other 4,489 tonnes come from?

sitenine's picture

Rehypothication - a scheme so simple that not one in a thousand will have it figured out until it's too late. We live in a system were 'investors' don't actually give much of a shit about whether or not the gold will ever be delivered. Hell, most 'investors' don't give much of a shit whether any actual gold exists at all - it is irrelevant since they are only interested in making paper gains. See, after thousands of years of alchemists failing to turn lead into gold, central bankers figured out how to turn paper into gold! All contracts that I'm aware of stipulate that the 'delivery' can be satisfied in paper. EVERYONE KNOWS THIS! They don't care! The only way to bring this all down is to start caring. Take delivery! Demand the physical while you can still get it close to spot! More people need to understand this. More people need to protect their wealth from what is about to happen.

[edit] Afterthought - The 'debunkers' out there would do well to have an honest conversation with 'gold bugs'. The discussion needs to center around the difference between paper and physical. So called gold bugs don't necessarily advocate buying gold, they advocate buying physical over paper (for reasons listed above as well as others). This is an IMPORTANT distinction because the debunker should not necessarily ridicule the gold bug for the wrong reason.

Pinto Currency's picture


Read the Comex Rulebook rules 2-230k; 7B01, and 7B14.

Do  you see anything requiring public announcement of forced settlement of cash instead of gold or silver?

How do we know that this is not happening right now with confidentiality clauses in return for premium cash payment?

Thisson's picture

Answer: we know it's not happening because every day, jewelers take physical delivery to make things such as wedding rings.  Do you see any sudden shortage of wedding rings?  Nope!

Colonel Klink's picture

Isn't this the same story of banking over and over?


-Goldsmith, Goldfarb, Goldman, Goldstein, et. al.

cloudybrain's picture

sell gold and buy toilet papers

Kirk2NCC1701's picture

<-- Bets on Eric Sprott storing the gold outside the US

<-- Bets on Eric Sprott storing the gold ootside Canada

jcpicks's picture

Good luck in demanding physical delivery.

achmachat's picture

luckily the wholesalers still provide the European dealers with one-ounce gold Maples, Australian Nuggets, Philharmonics etc. IF you keep your requests reasonable.

You just need to wait around two weeks longer than not too long ago.

Let's see how long until those two weeks become a month, two months... and eventually never.

Davalicious's picture

Yes, I bought a bunch of gold Krugs from the Guernsey Mint. They delivered in about 10-12 days. Said they were overwhelmed with demand. GM have their prices fixed to te London Fix. So I was able to buy a dip. Shockingly, the UK doesn't have tax on gold coins (they have it on Silver).

I have a few KG Gold in Bullion Vault (Switzerland) and then some CEF (Central Fund of Canada). I'd go 100% physical except I can't hold it where I'm living.

Going Loco's picture

Duff information. See

Your purchase was in Guernsey. Not part of the UK.

The only coin that is worth buying in the UK is the gold sovereign which is legal tender and therefore not subject to VAT or capital gains tax.

BigJim's picture

No gold in the UK is subject to VAT. But you're right - Sovereigns (and the other UK-issued 'legal tender' coins Britannias & English Roses) are the only ones not subject to capital gains taxes.

thisandthat's picture

No, within EU all investment gold is VAT exempt; gold jewellery and collectibles (and silver) are subject to VAT (although legal tender silver coins/coinbars pay reduced VAT, unlike bullion - eg: 7%, instead of 20%+).

lolmao500's picture

They gonna CDO that shit...

One of Wall Street’s Riskiest Bets Returns

In a sign of how hard Wall Street is trying to satisfy investor demand for higher returns, J.P. Morgan Chase and Morgan Stanley bankers are moving to assemble synthetic collateralized debt obligations, or CDOs.

Bear's picture

 synthetic CDO's ... I'm all over these

Colonel Klink's picture

I've heard you can even eat them with enough salt.

Bear's picture

Zero Hour comes when Zero Hedge says so ... stayed tuned

Charles Nelson Reilly's picture

My Ravens are like gold, everyone hates them.

Caviar Emptor's picture

Shhhhhh! Don't scare the children....

ZH11's picture

Always becoming and never being...

Milestones's picture

Goethe I believe.           Milestones

ZH11's picture

Even earlier my friend, Plato.

Which says it all really, thousands of years of 'civilisation' and the development of man only for the limbic system to remain firmly in control.

Our friend above has clearly not come to this realisation yet and still believes in absurb ideas such as rationality and order.

"The Aneristic Principle is that of apparent order; the Eristic Principle is that of apparent disorder. Both order and disorder are man made concepts and are artificial divisions of pure chaos, which is a level deeper than is the level of distinction making."

q99x2's picture

What happens to Bernanke when everyone finds out that he gave the US Governments gold reserves to Jamie Dimon?

freewolf7's picture

What happened to Obama?
What happened to Holder?

El Oregonian's picture

"What happens to Bernanke when everyone finds out that he gave the US Governments gold reserves to Jamie Dimon?"

We tell him to bend over and grab his Bernankles...

Jam Akin's picture

Isn't the bend over grab ankle thing BO's department?

Cognitive Dissonance's picture

How many paper Gold "owners" can you fit in a phone booth with one physical ounce of Gold? I'd say 100......if they're lucky.

<You're gonna need a bigger boat booth.>

Hulk's picture

Phone Booth ??? Man, where have you been ??? Mrs Cog, you'd better unchain the Mr from the bedpost and let him see if he can find a phone booth anywhere !!!

Cognitive Dissonance's picture

Phone booths are sooo pre-Cog.

<Unchain my heart....>

Milestones's picture

Well, how aqbout a Ray Charles fan then.         Milestones

eddiebe's picture

As long as the same big boyz stay in charge, fundamentals or any other reasons don't matter. Gold will do what they say it does.

Tinky's picture

Nonsense. They've lost control already, and are desparately trying to maintain an illusion.

Time's running out. Rapidly.

Caviar Emptor's picture

There is a chance of a cascading set of events that would upset their apple cart: If gold skyrockets that could be the very first domino to fall, taking the global economy with it. Of course at this poin, any major upset in the fragile global equilibrium could set it off.

Lets_Eat_Ben's picture

"Gold will do what they say it does."


To a point and then they lose their credibility. That is happening right now. Also, a large part of the large commercial shorts have repositioned and they may be ready to make money on the way up.

Mad Mohel's picture

I like AU, but your article turned me off with "plugged in luminary". Very queer.

F22's picture

And Jamie sold it to China....

sgorem's picture

@f22, you just earned a bonus greenie for your avitar, thanx...............

ultimate warrior's picture

CNBC said gold is going to $500/ounce. They seem honest and dependable so I trust them. Just stay the course & buy stocks and real-estate, they can only go up.


Money 4 Nothing's picture

When the wheels come off this wagon, Gold will dip hard, remeber September 2008? Don't freak, it bounces right back.

The first person to come forward with the only option or solution when the dust settles are the guilty party.

Winston Churchill's picture

Of course they are right.The premum will be $10K per ounce at that

point. If you can get anybody to sell it for green toilet paper, that is.

americanspirit's picture

And checking out Maria Buttaroma., I would invest heavily in Botox.