The Mysterious Gold Market

The S&P500 edged up another 1.5% last week. The bubble continues to grow, on nothing more—apparently—than the hope that the Fed can keep the stock market (and many other markets) rising to all-time highs, week in and week out. Volume, an indication of whether or not the average investor is participating in the rally, fell last week. So while the retail investors, as usual, are buying into this rally as it grows older and more vulnerable, by no means are retail investors pouring money into stocks, like they did during the dot-com bubble in the late 1990’s. Volatility fell back down to close to the lows of the year. To say that this stock market bubble is ripe for a correction is an understatement.

Technically, the S&P is extremely over-bought. It continues to hug or exceed the upper Bollinger bands on both the daily, weekly, and monthly resolutions. Several mathematically-oriented analysts have pointed out that the US stock markets are now following a parabolic pattern that always—when something similar happened in the past 100 years—resulted in a severe correction, if not an outright crash.

But isn’t the US economy finally getting better, providing a fundamental foundation for the stock market which tends to anticipate such developments by six months or so?

Nope. Not even close. GDP has never reached escape velocity since 2009, and more recently, its growth rate has actually slowed down to such low levels that whenever they’ve been so low in the last 100 years, recession has almost always followed. Last week, the small business optimism index suffered its biggest miss in almost two years. International trade results came in worse than expected. Initial jobless claims were also worse than expected. Productivity growth missed. The Empire State Manufacturing Survey massively disappointed, by falling instead of rising as expected. And industrial production fell, when it was supposed to rise slightly.

But stock markets liked the news, so the rallied to all-time highs.

But in other markets, there’s a developing story in gold that keeps on confusing many market observers who continue to disparage the asset, one that virtually EVERY central bank in the world finds indispensable. Gold prices, after hitting their most recent peaks two years ago, continue to struggle in bear market territory.

But the real story has to do with actual physical stocks of gold, which have been collapsing for the last year.

This is not supposed to happen. If the price of gold is truly market-driven, then the stocks of gold would remain relatively stable. It’s only when market prices are suppressed, that shortages tend to appear (think back to the days of the USSR and all the consumer goods shortages, shortages that developed because authorities artificially pushed the prices of these goods below market levels….so suppliers simply refused to supply them).

And that’s exactly what appears to be happening in the physical gold market, where the ratio of paper (or derivative-based) gold ownership relative to actual physical gold available is soaring to multi-decade highs.

Today, at the COMEX, there are almost 69 paper claims per each ounce of actual physical gold in inventory.

This is an astounding development, especially when one sees that this ratio was closer to 20 for most of the past decade.

This means that for every 1 ounce of actual gold in this major exchange, there are 69 paper owners who claim to be owners of that same single ounce of gold!

History tells us that this massive distortion is always solved by a huge increase in the price of the asset that’s over-owned on a paper basis. Why? Because if some of the paper owners of gold decided to convert their paper claims into the actual metal, then it would take far higher prices for owners of the physical metal to sell it, in order to satisfy the demand of the paper claimants.

The conclusion is simple. It appears that the gold market is being manipulated….a lot. And it appears that when this manipulation ends, that the price of gold must rise….a lot.

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