Adrian Douglas: What can ever beat the gold and silver cartel?

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By Adrian Douglas
Saturday, July 4, 2009

"Dear GATA:

"First, thank you for your efforts. Please keep up the outstanding work.

"I recently viewed the video of the GATA panel discussion that took place at the 2009 Vancouver Resource Investment Conference. It was fascinating. That led me to your Internet site and I have enjoyed reading some of the posted articles. One that caught my attention was Adrian Douglas' "Pirates of the Comex." My question may seem juvenile, so please forgive me, as I am still playing catch-up with understanding the gold market.

"I was wondering if the financial institutions that are identified in Douglas' study truly have the means to dominate the short interest position in the market, and if they are allowed to continue this practice (without any serious oversight or regulation) and they continue to throw out these massive leveraging schemes, then why won't they continue to do so in the near, intermediate, and long term as well? Who or what will be able to compete with such massive arsenals at their disposal?

"In other words, what are the forces that will be strong enough to overpower their strategies?

"-- JDA"

Dear JDA:

As the author of the article to which you refer, I would like to respond to your concerns.

The forces that will bring down the precious metals cartel are the forces of supply and demand that have governed economics throughout history.

Paper supply can mimic real supply for quite some time but not forever. The price of gold and silver are set on the Comex futures exchange. The promise to deliver gold and silver in the future can easily swamp the future demand for gold and silver precisely because it is in the future. Investors cannot overpower the cartel in this quaint game of poker because the cartel always has enough fiat money to go "all in" and bluff the long investors.

However, the cartel cannot win this game in the physical market and the front month or cash market of the futures market. For no matter how much fiat money you can produce, it will never be real physical metal.

The world is moving into Weimar-style fiat money creation and the leading culprit is the United States. In this environment investors will take no substitute for gold and silver. They want the real metal. Even foreign central banks such as those in China, Russia, Brazil, and Venezuela are buying physical gold.

The cartel has been using some real gold to leverage its paper gold sales. This is like fractional reserves in banking, where you hope that no more than 10 percent of customers ask for their money.

In the futures and derivatives markets 1 tonne of gold can back 100 tonnes of paper gold sales because only 1 percent of these sales require real metal to be delivered. The market price responds as if 100 tonnes of gold have been sold, not just 1 tonne.

But as more investors want real metal, the leverage of paper becomes impotent. From my work and much of the work of others in GATA there are strong indications that we are getting close to a default in providing real metal. At that point the game will be over, the physical shortage will be clear to everyone, and the price will rocket.

I believe the situation is even more dire in silver than in gold because gold is not being consumed but rather is becoming scarce because it is being hoarded by more and more smart investors. Silver is becoming scarce because it is both being hoarded by smart investors and being consumed by industry and ending up in landfills never to be recovered.

The U.S. Geological Survey estimates that silver will become extinct by 2020 -- just 11 years from now all silver in the earth's crust will have been mined and consumed. Yet silver now is trading at only its cost of production.

The world cannot live without silver. Paper derivatives can not be used to make cell phone batteries or RFID transmitters or electrical solder, etc.

What difference do you notice between a cookie jar that has a hundred cookies in it and a jar that has one left in it? There is no difference. You put your hand in and pull out a cookie. What happens next time you put your hand in and there is nothing there? Yes, there is little warning. Someday soon no gold and silver will be available. The news media will be surprised. Not GATA.

In a few days I will report some information that this default could come at any time because the Comex is not what it seems. Stay tuned.

-----

Adrian Douglas is editor of the Market Force Analysis letter (http://www.MarketForceAnalysis), an oil market consultant, and a member of GATA's Board of Directors.

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