Confidence in the gold market is in other words reflected in the price of gold futures relative to spot. Confidence is expressed through a marginal premium on future contracts, and a lack of confidence is expressed through a premium on spot. But we are seeing neither of these two situations in the gold market at the moment. Rather than a marginal premium on futures, there's a big premium to the point where a lot of money can be made by buying bullion at spot while simultaneously selling futures. The premium is so large that it easily covers the cost of storage. Anyone with access to a bank vault and easy credit can make a killing by simply holding gold for a few weeks.
If this situation persists, bullion banks will be empty in no time, and we will presumably see a sudden shift from premium on futures to premium on bullion. But right now, confidence appears to be high. No-one is too concerned about any future delivery problem. Yet, the situation cannot continue for long. Some equilibrium must be re-established, which begs the question why we have this situation in the first place. A free market will always find equilibrium, so how can we have a situation where money can be made, risk free, by simply buying spot and selling futures?
It appears that some entity is actively seeking to suppress the spot price, but somehow failing to suppress the futures price at the same time. This entity is almost certainly the central banks that are printing a lot of currency at the moment. The last thing they want is for gold prices to react by going markedly higher. But the failure to suppress the futures market indicate that some other entity is actively interfering with an intent to drain bullion banks of their gold. This entity appears to be unconcerned about actual delivery. Most likely, it already has the gold it wants, and is merely seeking to break the bullion banks. It must know that there's hardly any gold left to be delivered. This entity is likely to have a lot of gold already secured, excellent intelligence as to the real state of the gold market, and sufficient cash to buy futures at a pace sufficiently high to outrun the production of such contracts.
Bullion banks which have had the privilege of issuing future contracts in order to suppress gold prices on behalf of central banks, are now cornered. There's a limit to how many future contracts they can issue before their credibility collapse, and the entity mopping up the contracts is fully aware of how close these banks are from defaulting on their promises.
In this respect, it is interesting to note that Putin declared at the end of March that Russia would, after a decade of aggressive accumulation of gold, no longer buy gold domestically. Russia has also sold most of its US treasury bonds for ready cash. The Russian central bank is in other words both highly motivated and perfectly positioned to pull off the sort of stunt that we are currently seeing. Other central banks may also be in on this. China and various European and Asian countries come to mind.
It appears then that someone has decided to activate the reset button. It remains to be seen if they will be successful. But time is running out. If the situation persists, bullion banks will default, and a completely new monetary system will have to be put into place so that gold can find its new equilibrium.
By P199 - Own work, Public Domain, Link
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