Nathan McDonald for Sprott Money [11]
Precious metals have taken a horrible beating over the past month. They were suppressed to levels not seen since 2010. The result of this price depression was a massive increase in demand from individual investors and nations alike.
No longer are people fooled by the paper price of precious metals. Premiums have remained relatively high through this price correction and demand has been so intense, that the US Mint was forced to cease sales of their ever-popular Silver American Eagles.
Nation states, such as China and Russia are well known for their affinity to gold and have also continued their accumulation of precious metals. Russia, which officially became the fifth largest holder of gold recently, announced that it has once again increased their gold reserves by another 150 additional tonnes in 2014. An increase of 8.4% year over year.
The demand from China, Russia and India are well known, but now a previous seller of gold products could be entering the arena. The ECB, a long time disbeliever in precious metals is currently battling stubbornly low inflation and may be forced into a very unconventional strategy.
[11]
Yves Mersch, a member of the ECB’s executive board, indicated that inflation levels are only 0.4 percent, a far cry from the targeted goal of 2 percent set by the ECB. The average person should take this news as positive, given that your standard of living and hard earned savings are not being eroded at a faster pace. Yet central bankers don’t look at it this way. To them, this is incredibly negative news.
Western central banks know that they need to massively increase inflation. This is the only way in which they can alleviate the huge debt levels that have been accumulated by their misguided wars and spending.
[11]
To help assist in increasing this inflation the ECB has indicated that it may begin acquiring gold, shares and ETF’s. This news comes as a shock to many, given the ECB’s previous resistance to all things gold and the fact that their fiat currencies are in direct competition with the yellow metal. Mr Mersch, does however add a warning:
“Every purchase of a security – or precious metal or foreign currency – naturally increases the credit risk of the buyer”
This additional demand, if the ECB pursues this policy, could be the straw that breaks the camels back. As reported demand is already severe enough at this artificially depress price levels and any additional demand could cause a fail to deliver from the COMEX, a scenario that would catapult prices to new highs and set the gold market free.
Some sources [12]of this demand are the Shanghai gold exchange, which is currently acquiring roughly 60 tonnes of gold per week, or in other words a staggering 3000 tonnes per year! India and Russia are not helping alleviate supply restraints either, having acquired 94 tonnes and 37 tonnes in September alone.
This cannot and will not go on forever, given the fact that this is only a few key sources. Don’t forget, much of the Eastern world is also a net buyer of precious metals. With a weekly global mine production of only 230 tonnes, a default of delivery could happen at any given time.
The question is, where is this source of additional supply coming from? Western central banks cannot have much more in the vaults and we are seeing huge withdraws from the COMEX, that are putting it dangerously close to a default.
Perhaps, the recent admission by the Ukrainian central bank indicating that their gold reserves are near depletion, is the source of this additional unknown supply:
[11]
In an interview on Ukraine TV, none other than the head of the Ukraine Central Bank made the stunning admission that “in the vaults of the central bank there is almost no gold left. There is a small amount of gold bullion left, but it’s just 1% of reserves.”
The writing is on the wall. The fact is, the world is now a net buyer of gold and demand is beginning to overwhelm supply. The recent price drop has only helped boost this demand as investors are correctly seeing precious metals prices as “on sale”.
Those manipulating the price of precious metals are going to be forced into a strategic retreat, recent price action is already indicating this. The metals will recover and their prices will go higher. It is only a matter of time before the dam breaks.
Nathan McDonald for Sprott Money [11]