Precious Metals Piracy: Demand, Currencies And 'The Daily Fix'

by: Emmet Kodesh

Three - four centuries ago privateers flying the Jolly Roger and colors of England (like Sir Francis Drake of the "Golden Hind") sought gold doubloons as the true measure of wealth. Drake, called El Draco ("the Dragon") by the Spaniards brought Queen Bess treasure that erased England's national debt. Today "piracy" spans resource nationalism (seizure by Dominican Customs of Barrick Gold (NYSE:ABX) cargo from Pueblo Viejo bound for Canada), Presidential demands that Rio Tinto (RIO) put a Mongolian on its board, the London Daily precious metals price fix (explained below) and massive short selling on COMEX. We must consider how this diverse modern piracy interfaces with increasing use of the Yuan (NYSEARCA:RMB) and other BRICS currencies for trade. Also in this picture are dollar-derivative dangers and stagnant retail sales that precede major market corrections. This should show us where enduring value and defensive positions are to be found.

On March 13, Dominican customs officials at Santo Domingo airport stopped a Barrick cargo of ore from the Pueblo Viejo mine it owns 60-40% with Gold Corp (NYSE:GG). Two weeks earlier, President Danilo Medina earned ovations in his parliament by blaming Barrick for the poor children in Dominican streets. "I promise you that Barrick will not get all the benefits" he said. That's true: per contract the Dominican will get about $7B, 50% estimated proceeds of 25-year life of mine product. The halted shipment, 6k oz Au and 30k oz Ag may be inspected March 18. The Director of Customs claims that Barrick's previous 14 shipments were not adequately reviewed. This follows President Medina who invoked President Obama in bashing the miners for not giving back enough to his State.

The scenario is like Harvard-groomed Mongolian President Tsakhia bashing RIO for not giving his country more than 71% of the wealth RIO and its majority owned Turquoise Hill Resources (NYSE:TRQ) will generate from their work, technology and expertise in Oyut Tolgoi. Despite the comments and cutting abstention of American World Bank reps at IFC-MIGA, half a dozen major banks have agreed to loan RIO $4 B to expand its work. Similarly, Pueblo Viejo should proceed after additional discussion. Just get used to occasional issues at customs, fiery speeches to parliaments and threatening comments by non-governmental groups (NGO's) affiliated with international finance.

Positives for miners and gold are continued buying by 38 mostly Asian central banks, while the Fed and BoE proxies in America and England use the COMEX and paper trade vehicles like the SPDR Gold (NYSEARCA:GLD) and Silver (NYSEARCA:SLV) ETF's to suppress prices with massive sell orders before and after hours. "Who would short gold in a rising gold market" asks former Assistant Treasury Secretary Paul Roberts.

Dan Norcini notes that short positions are now more than 10% of the open interest in gold and that Asian Central Bank buying along with a slight adjust in the daily "fix" in London could obliterate the shorts and send gold quickly to and past $1700/oz.

Regarding silver, Norcini observes that long positions have been increasing since February. Michael DiRienzo of the Silver Institute has released a paper showing that in the next two years, industrial - Tech demand alone for silver will outstrip supply by 53% while retail investment surges. Sales of silver eagles in January and February set records and caused the U.S. Mint to suspend sales. "The swap dealers have moved to the long side of the market" Norcini concludes. Expect strong rise in Ag prices. China has expanded silver purchases too and the current 54-1 Au/Ag price ratio will reflect these trends and move toward its 16-1 historical mean.

Another factor suppressing gold prices is breaking down. Just as RBS, Barclays, UBS and other Banks for years used the LIBOR (London InterBank Offered Rate) to manipulate world lending rates and last year were exposed and slapped firmly on the wrist, investigations of the five banks that set daily gold and silver prices have begun. Since 1919, the players have changed but the "fix" works the same:

"…twice-daily teleconference involving five banks - Barclays (NYSE:BCS), Deutsche Bank (NYSE:DB), HSBC (HBC), Bank of Nova Scotia (NYSE:BNS) and Société Générale (OTCPK:SCGLF) - while silver is set by the latter three. The price fixings are then used to determine prices worldwide" reports the Guardian.

"At the start of each gold price-fixing, the chairman announces an opening price to the other four members who relay this price to their customers. Based on orders received from them, the banks declare themselves as buyers or sellers at that price." Doubtless there is collegial conversation prior to the "fixing" and the absence or presence of buyers or sellers is arranged to lower or raise prices. For example: "If at the opening there are only buyers or only sellers, or if the numbers of bars to be bought or sold does not balance, the price is moved and the same procedure is followed until a balance is achieved. The silver fix dates back to 1897." This procedure is context for many reports of pre and post market interventions in gold via COMEX to move prices. As the fiat system increasingly requires games, the gaming is wearing thin.

Also supporting precious metals prices and hopefully sound money, China is allowing foreign firms to establish accounts in RMB (Renminbi) up to 30% of their investments in China. This furthers the shift from dollars as the world's reserve currency by bilateral credit deals and policy papers. In 2011, Turkey legislated to allow banks to count their gold holdings, which they have been increasing as "riskless" reserves. The impact on economies and shift to new world reserve currency per OMFIF (Official Monetary & Financial Institutions Forum) is discussed here.

China now holds $3.3 B in foreign reserves (about 63% in dollars) and continues to diversify its holdings and position the RMB as a partner to dollar. In keeping with its standard opacity it has not officially announced the change. Companies establishing accounts include Intel (NASDAQ:INTC), Samsung (OTC:SSNLF), Shell RDS.A) and Caterpillar (NYSE:CAT). China pledges to ease inflow and withdrawal of foreign capital "to persuade companies to move their treasury operations to Beijing or Shanghai, rivaling Hong Kong or Singapore as regional financial centers." It will next rival or join New York and London as international banking and commercial centers. Exits from the fiat system continue while the peoples of the West are held hostage to the debt-derivative-collapse game.

Eric Sprott notes that there is over $1 quadrillion in derivatives held by banks on less than 2% actual reserves. He and Paul Roberts believe a collapse of the dollar and financial system is inevitable. The euro again is dropping as Cyprus has declared a bank holiday and plans a 6.75% on all accounts, 9.9% on those greater than 100k Euro. That would upset the sensible plans of OMFIF for a new reserve currency of the dollar plus the BRICs currencies backed by gold. Blackstone (NYSE:BX) and other major investors are buying scores of thousands of REO's and selling the expected rent as AAA loans. This may be another mortgage-backed securities fiasco. We soon will learn if those who manage the system want to transition from fiat-debt currencies to coherent money or if they prefer to crash the world and rule more easily over the impoverished residue. "Some people just want to watch the world burn" and fact is stranger than fiction.

In the interim, piracy at the top and bottom amid strengthening and varied demand for precious metals are the order of the day. Please see my column, "gold, silver, equities or a farm" and consider the allocation and arrangement best for you. Massive precious metal producers like Barrick, Gold Corp, Kinross Gold (NYSE:KGC), debt-free fast-growing juniors like McEwen Mining (NYSE:MUX) and Fortuna Silver (NYSE:FSM), premier streaming company Silver Wheaton (SLW) and mixed commodity and energy plays like undervalued mining giant Freeport McMoran (NYSE:FCX) are strong investments. If you have followed my suggestions to "Buy the Ski-Jump Market" trim your positions and add to cash, land or companies like those noted above.

To complete this macro view, note that Retail sales predict market trends. In mid-2004, retail sales went flat for 30 months. In early 2007, they began declining steeply. Ten months later the indices began their extreme choppiness and six months after that their plunge. They hit the canyon floor in March 2009 several months after retail sales had begun to rise. Since the beginning of 2012, fifteen months ago, retail sales have been flat as the indices continue to soar, their rise impeded by brief corrections in May-July 23 and November. John Williams writes that inflation adjusted retail is not improving. Better watch this. Watch bellwethers like TJX Companies (NYSE:TJX). As Williams and others point out, the earnings and savings of most Americans are flat or declining as taxes increase and cripple full-time hires. This will keep retail sales limping and eventually the indices will plunge to rejoin the reality from which they have fled, goosed by Fed injections of currency, a fiscal-economic electric chair. The markets are like Frankenstein's monster, staggering along on digital credits while the table is set for a massive rise in precious metals and re-modeling of the world's financial-commercial house. Read and prepare for it.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KGC, MUX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.