Why Are Premiums On Physical Gold And Silver Rising Even As Futures Crash?

Includes: GLD, SLV
by: Moneyline

Premiums on physical Gold and Silver are on the rise again after both metals were smashed again Wednesday. Why are investors paying premiums for Gold and Silver when so many forecasts on further crashes are doing rounds? What do they know that these biggies are missing or is it simply deeper manipulation of the Paper Gold and Silver prices? Is it again due to the naked shorting by the usual suspects, trading desks, big banks and hedge funds? Has the physical market completely disconnected from the paper market? Right - Gold and Silver physical markets are facing a complete disconnect with the paper or the futures market only based upon the fact that these paper markets can be easily manipulated. These markets were initiated for achieving a better price discovery based on current fundamentals and prospective future demand and supply factors. But now have become a playground for the Big and Influential or more popularly known as TBTF. Much has already been spoken, written and debated upon the same and I would prefer not to get into those details again here. Whatever is the reason for the gold and silver price smash, what I wonder is, who in his right mind would prefer to pay a large premium for something that he would get at a much cheaper price in just some more time? - No, these investors just won't wait, but rather stand in long queues, pay premiums and confirm holding some Gold and Silver rather than await a more attractive price. Why? It's the shortage of supply in gold and silver and more bottlenecks in supply expected as the mining industry halts productions. Going ahead I'll explain the same.

Divergence between rising Gold and Silver Demand & falling Prices defies fundamentals of demand & supply

The widening divergence in the physical demand or price (premium) of Gold and Silver in comparison with the prices of paper futures of the same breaks all fundamentals of the demand and supply chain. Generally, prices get boosted when demand surges or even more when demand is more than supply and vice versa. Right through the onset of 2013, we have seen a huge surge in physical demand for Gold and Silver bullion, but ironically enough; the prices of the so-called paper Gold and Silver or the Futures market contracts have steadily been crashing. There seems no legitimate reason for the price crash in the Futures markets, apart from massive price manipulation. Gold and especially Silver Prices are heavily depressed and at unreasonably cheap levels, which are also a cause of huge concern for the mining industry which will have to bring productions to a halt. Supply bottlenecks will be all the more severe which may trigger even higher premiums on physical Gold and Silver. This divergence and illogically low prices of gold and silver cannot sustain for long simply for the impact of what it will do to the law of supply and demand as well as for the production of the metals. Why do some of the major banks and financial advisory institutions continue to paint a dismal picture for gold and silver at these stupid cheap rates, although most central banks continue to build their reserves at attractive lower prices?

Gold premiums doubled in India on Wednesday as suppliers struggled to meet surging demand after a ban on consignment imports, but futures prices fell to their lowest in more than a month as international gold prices fell due to a strong dollar. India, the world's biggest buyer of gold, now requires importers to pay upfront for inventory, making it difficult for smaller jewelers with lower working capital to source supplies. The government also raised the import duty to 8 percent in May to keep a lid on the surging current account deficit. Premiums charged on London Gold prices shot to $20 an ounce on Wednesday from $8-$10 on Tuesday. "We are unable to supply, though there is demand ... we give deliveries after 2-3 days," said Harshad Ajmera, proprietor of wholesaler JJ Gold House in Kolkata. Indian gold imports fell to $36 million in the second half of May from an average of $135 million per day in the first half, Finance Minister P. Chidambaram said earlier in June. As of now, India has ruled out a blanket ban on gold imports or any increase in customs duty from the current 8%. - As reported by Reuters yesterday.

On Wednesday, the actively traded MCX Gold contract for August delivery on the Multi Commodity Exchange (MCX) was down by over 3% to 25,758 rupees, a level last seen on May 20. A weaker rupee limited the downside. The Rupee plays an important role in determining the landed cost of dollar-quoted gold. MCX Silver for July delivery slumped down by over 4% at 38,825 rupees per kg.

By 2016 China will be importing nearly 2,000 tons of Gold each year:

China is becoming increasingly powerful as a supplier of raw materials including iron ore, aluminum, nickel and coal as it boosts output from local mines and smelters, according to Standard Chartered Plc. Gold and copper are among the raw materials that are least vulnerable to China's growing capacity, the bank said in a report dated June 21. Other commodities cited as insulated from the trend were platinum and diamonds, while tin was reported to be somewhat resilient. Gold output in China is poised to rise almost 10% this year to a record 440 tons, the nation's mining association said last week. "Although it is the world's largest producer of gold, 40% of its production uses imported gold in concentrates," according to Standard Chartered report. "It is not inconceivable that by 2016 China will be importing nearly 2,000 tons of gold each year, which is 80% of global mine supply." - by Standard Chartered Plc and reported by Bloomberg Which again means increased physical demand for Gold.... and a lot of it.

What can now be expected about Gold and Silver in the near term?

Whenever these heavy crashes in gold and silver occurred recently, shorted volumes equaled more than the annual mine production of the global mining industry. It's ridiculous to think that much gold and silver could be acquired, positioned, and then shorted in such a short space of time. It has simply being naked shorting, but the good news is that these sellers are at record short levels and very highly vulnerable to a violent short squeeze. The very same bullion banks that have concentrated shorts and are at the risk of defaulting will soon be compelled to go long - very long. There is an acute shortage in the physical gold and silver markets and the paper markets are having concentrated shorts. Shortage in physical supply will increase as the mining industry lowers or even halts productions due to various reasons I explained in an article posted earlier. With inflationary pressures on the rise again and the US dollar set to weaken after a two-month surge, Gold and Silver are aligned for an extraordinary rebound just as investor sentiment plumbs to new depths. Expect nothing short of massively violent recoil in this extremely oversold gold and silver market.

Moreover, the globally rising debt levels and currency wars that are fully underway everywhere in the world not only justify but also advocate higher gold and silver prices than they were two years ago in 2011 - Silver above $50 and Gold above $1921. The Fed's QE and the money printing that is going on globally are not going to stop just so soon. It is fine to talk of "Taper" in theory, but is next to impossible while getting to practically implement it. That too will get kicked down the road till infinity whenever the time comes. We have all seen the same happening so many times. Remember the recently termed "Fiscal Cliff' or the "Debt Ceiling", to name a few, which all got postponed and will keep getting so, till explosion time. So don't worry on the QE tapering - it is bound to continue. The much addicted US markets cannot survive without this money supply. We all saw the US GDP numbers yesterday - need say anything more?

Gold and Silver remain the best bet against the backdrop of crazily massive debt distress and fiscal pitfalls in the world and particularly in the U.S. and Europe.

What do you think? Please do pen your thoughts below….

Disclosure: I am long SLV, GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Silver,Gold,