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A Crisis of Confidence, Part Two - Craig Hemke (May 19, 2020)

The blue screen with some graphs and bars

May 19th, 2020

Back in March and April, a chasm opened between the dollar price of spot gold (XAU) and the front month COMEX futures contract. So-called experts reassured us that this was simply due to "logistics" and "gold being in the wrong place". Was this true, or might it have been just another set of apologies from the usual shills?

We first wrote about this issue on April 7, and it would be a good idea to start with this link. Please give it a look: https://www.sprottmoney.com/Blog/a-crisis-in-confi...

Below is a screenshot of the key section of that post:

In the six weeks since, this spread/premium in COMEX gold has alternated from +$20 some days to as little as +$2 on others. Indeed, mines and refineries have since re-opened, and physical gold seems readily available for delivery in London and other locations. As I type, this spread—which was as high as $12 earlier this week—is once again just $3.

So problem solved, right? Mmmmmm....not so fast.

Below is a screenshot of the current spread/premium in silver. As with gold, silver has its own spot pair quoted as XAG/USD. It also has its own COMEX front and delivery month, which at present is the July contract.

As my friend Andrew Maguire likes to say: "Wait a second...hold on just a minute." So the spread in COMEX gold has returned to "normal", allegedly because supply strains have eased and confidence in delivery has returned. OK. But how does that explain the ongoing and widening spread in COMEX silver? By the logic of The Shills & Apologists, the global silver market must now be suffering from its own supply strains and a lack of confidence in the bullion banks.

Why else would simple arbitrage not close the gap? Again, a deep-pocketed party should be able to buy 5,000 ounces at spot and concurrently sell a COMEX contract to deliver those 5,000 ounces in July. It's an easy, risk-free trade and with a 50¢ spread, just one contract would net you $2,500. Do this 100 times and you profit $250,000 in about six weeks. Do this at the COMEX position limit of 1,500 times and you pocket $3,750,000—again, RISK FREE—in about six weeks.

Now of course, you and I don't have the $135,000,000 needed to put on this trade just lying around. But banks do. Large hedge funds too. So why don't they? A $3,750,000 six-week profit on $135,000,000 is 2.78%. Where on earth at this moment in 2020 are you guaranteed to profit 2.78% in the next six weeks? NOWHERE! What would that be? About 30% annualized??

And yet NO ONE is doing it. How do we know? Because the spread remains and continues to widen.

This can only mean one thing. Putting on the trade is NOT risk free and the possible gain of 2.78% on just six weeks is NOT guaranteed. And why? A lack of confidence in the physical delivery needed to complete the trade in July.

Perhaps this is only due to the Covid-related mine closures in Mexico and Peru? Those two countries accounted for about 40% of global silver mine supply in 2019. See this link: https://www.sprott.com/media/2268/world-silver-sur...

But both countries are coming back on-line now after only missing production for less than two months:

• https://www.mining-technology.com/news/peru-to-eas...

• https://www.mining.com/mining-in-mexico-to-restart...


From that Sprott report linked above, Mexico produces about 15,000,000 ounces per month, while Peru produces about 12,000,000. Taking both offline for two months removes about 55,000,000 ounces from the global supply chain. Could that amount be enough to completely upset the pricing scheme and cause this crisis of delivery confidence?

At first glance, you wouldn't think so. The CME/COMEX purports to house over 300,000,000 ounces in their approved vaults. That would seem like more than enough silver to bridge the production gap and provide enough immediate delivery for the arbitrage to kick in and close the spread/premium.

Yet the spread remains, and it has actually widened in the week since both Mexico and Peru announced the easing of Covid mining restrictions. So what's the deal? Is silver just "in the wrong place" too? Are there "not enough airplanes flying" to move it around the planet in sufficient size?

Maybe you should begin to consider instead whether or not these stories of "plenty of metal lying around" are simply that—stories. If the Bullion Bank Fractional Reserve and Digital Derivative Pricing Scheme really did have plentiful physical metal to prop it up, then premiums between spot and futures should NEVER happen—regardless of short-term mine and refinery closures. The system itself should be able to provide enough existing metal to fund the arbitrage.

The fact that the spreads persist betrays the cover story provided by the paid shills for the system, and Ockham's Razor provides the simplest answer: The spreads/premiums persist because there is NOT sufficient physical metal to satisfy immediate delivery demands.

As an investor, understand what this shortage implies about the current pricing scheme and its future. Demand for physical metal is very likely to intensify in the months ahead as the global central banks race to monetize sovereign debt to combat the economic collapse brought about by Covid-19. This direct monetization dilutes and devalues the existing fiat money supply, and only physical precious metal can protect you from the deleterious impacts.

Growing physical demand will stress The Banks and their system to greater degrees, and the eventual collapse of this scheme will lead to a new pricing structure that is related to supply and demand of physical metal, not the supply and demand of digital derivatives.

When this day comes—and these current spreads may signal that it's coming sooner rather than later—the price discovered for physical gold and silver will likely not be $1745 for an ounce of gold and $17.85 for an ounce of silver. What will the price be? Maybe we'll write about that next week.

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.