I am going to get in trouble with all the gold bugs for this post, but I don’t care.
Before I do, let me declare the following; I actually love gold down here. I am long way too much, and I have the scars to prove it. I even think that you need to own physical gold as opposed to gold ETFs or futures. I agree with almost all of the gold bugs’ worries about the instability of the financial system. Heck, I am even sympathetic to the famous JP Morgan line about the shiny yella’ fella.
But if there is one thing I cannot stand, it is this terrible narrative “paper gold” is declining in price, but “real gold” is maintaining its value. Let’s make one thing clear – for the time being, they are one and the same.
Yesterday Zero Hedge wrote a post where he stated that “paper gold” was hitting new 5 year lows.
Really? “Paper gold” hitting five year lows? As opposed to “physical gold” that is rocketing higher? Last I checked, Sprott Money physical gold was moving lower in lock step with the “paper gold.”
The higher price for physical delivery versus spot is the spread that Sprott Money earns, but make no mistake – the price for physical delivery is also hitting five year lows!
I understand this might not always be the case.
I own some physical gold as insurance against this possibility. I will not argue one for one moment gold derivatives are the same thing as real gold. Buying the GLD ETF or COMEX futures does not guarantee you will get your gold when you need it. At some point in the future, I fully expect there to be a dislocation between physical gold and the derivatives.
But let’s be clear – that time is not today.
Right now, when the so called ‘paper gold’ goes down, so does the ‘real gold.’
If it didn’t, then shrewd traders who were long physical gold would sell it in the spot market, buy futures and take delivery. Yes, the return on this trade varies depending on the tightness in the spot market, but we are talking about a few basis points. There are currently no problems with delivery.
‘Paper gold’ is moving lock step with ‘real gold.’ End of story. Anyone who claims ‘paper gold’ does not represent the real market is feeding you bullshit.
I hear this narrative about the manipulation of the ‘paper market’ all too often. These gold bugs love to spew on about the dislocation between the two markets. They contend the ‘paper gold’ is easily moved lower, but the ‘real gold’ market is solidly bid.
The following comment from Sprott Money is indicative of the gold bug’s narrative:
This action by Rajesh Exports, is just one more example of the stellar fundamentals underlying the physical gold market. Forget about the abysmal paper market and focus on the facts.
They want you to ‘forget about the abysmal paper market’ and focus on ‘the facts’ of the supposedly ‘real gold market.’
Trying to hide the fact the price of gold is sucking wind by droning on about the manipulation in the ‘paper market’ is just a sign of a trader trying to justify a position that isn’t going their way.
There is absolutely nothing stopping some big hedge fund, or rich individual, or even another country (like China) from buying these ‘manipulated’ gold derivatives and taking delivery. Maybe then we might see some problems with delivery. If that were to happen, what do you think the price of gold would do? Of course it would shoot higher. So if this ‘paper gold’ is being manipulated lower, then why doesn’t someone big make themselves a fortune squeezing the manipulators?
The answer is obvious. No one is squeezing the ‘paper gold manipulators’ because there is simply too much gold for sale right now. Gold is not going down as the result of the big bullion banks’ nefarious collusion. Gold is going down because the massive bull market between 2005 and 2011 did what all price rises do – it brought about too much supply. It is as simple as that.
Now, don’t mistake my rant about ‘paper market’ excuses as a sign that I am bearish. I am a huge gold bull. And don’t mistake this rejection of the gold bug narrative as my belief that gold ETFs and futures are the same thing as real gold. They aren’t.
I will repeat it again just to be clear. At some point in the future, there will be a problem with the delivery for gold. There will be a squeeze. I completely agree with Kyle Bass’ assessment of the risk and rewards of holding physical gold versus some derivative.
Kyle: “What if 4% of the people want delivery?”
COMEX Delivery Manager: “Oh Kyle that never happens. We rarely ever get a 1% delivery.
Kyle: “Well, what if it does happen?”
COMEX Delivery Manager: “Oh, well price will solve everything.”
Kyle: “I said thanks, give me the gold.”
Kyle: “As a fiduciary, to the extent that you own gold and are going to own it a long time, it is not a trade….in the COMEX warehouse they had $80 Billion of open interest, and $2.7 Billion of deliverables….thats an easy one, you go get it.”
Central Bankers have been tossing around trillion dollar quantitative easing programs like Lindsay Lohan throws back Vodka Strawberry Lemonades. So far, gold has been impervious to this drunken behaviour, but this divergence cannot continue forever.
When the squeeze happens, it will be epic and scary. Kyle is right that the time to take delivery is today because when you want it in the future, it won’t be available.
But this crap that the ‘real gold’ market is healthy while the ‘paper market’ is being driven lower by evil manipulators is simply too much to take. Gold is for sale right now. Period. There is no difference between the two different markets. You can’t claim that somehow one market is healthy while the other market is going down as the result of manipulators. It makes as much sense as saying that the ‘paper market of the S&P 500 ETF’ is going down while the ‘real market’ for the actual stocks is healthy. The two are of course one and the same.
As long as there is the ability to arbitrage between the two, they are the exact same. Right now, gold and its derivatives are interchangeable. There are absolutely no signs that there are any problems with delivery. You can forecast this won’t always be the case – I am completely fine with that. But you can’t claim there is any difference today.
Confusing the issue with all this talk about ‘paper gold’ only makes us gold bulls look like nut jobs.
Instead, let’s man up and admit we are wrong so far. I have accepted it. I am fine with the idea there are precious few that think gold is a good buy down here. Isn’t that the very definition of a good opportunity? If everyone thought gold was going up, then it wouldn’t be trading at this low price. So instead of making excuses, let’s just celebrate the fact that no one likes gold.
Thanks for reading,