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Gold Premiums Soar in Three Foreign Markets
By Patrick A. Heller

The prices of gold and silver were clobbered last week, apparently almost all on the basis of the short selling of paper contracts. There are several indicators of rising physical demand that lead me to conclude that this is a temporary effect.

1. China, India and Vietnam are all among the top 10 gold consuming nations. Demand in those countries was so strong at the “cheap” prices by the end of last week, that prices in all three countries, relative to the world spot price, soared. In the Shanghai market, physical gold was trading for almost $10 above the spot price, perhaps an all time high. The premium was almost that high in India ($9.87 higher than the London a.m. fix last Friday), after having traded almost right at world prices just a few days earlier. The premium above world spot price in the Vietnamese market again rose above $30 after being less than $20 for several weeks.

2. Gold lease rates, while still quite low, have soared in the past two weeks. Lease rates are one indicator of relative demand for immediate delivery of physical gold. One year lease rates have jumped about 60 percent in the past two weeks to return to levels in effect at the end of November 2009 (as gold was approaching $1,200). One- and two-month lease rates, which were negative two weeks ago (literally meaning that the lessor would lose money on such a lease) have turned positive and are at their highest levels in the past several months.

3. In the last three trading days last week, the Dow Jones Industrial Average lost more than 5 percent to reach its lowest point of the year. As of last Friday, this average was below its 20- and 50-day moving averages, which is a signal to traders who follow technical charts that prices may be headed even lower in the immediate future. At least some traders looking to get out of the stock market are likely to switch some money to precious metals.

4. Last week, the New York Commodity Exchange reported an “adjustment” where more than a half million ounces of the gold stored in bonded warehouses as dealer inventories was reclassified as investor inventories. In one step, dealer inventories, which are theoretically always available to deliver against maturing COMEX contracts, were depleted from approximately 2.3 million ounces to 1.8 million ounces, or almost 25 percent. This massive change was reported without explanation of why it was done.

Although the gold did not physically move anywhere, it is now counted as investor-owned inventory, which means that the gold is no longer automatically available to deliver against COMEX contracts. Instead, it is available for such a delivery if the owner chooses to do so. However, owners of investor inventories also have the options to simply leave their gold in the warehouses or to take physical delivery themselves.

Beyond these indicators of looming physical gold (and silver) shortages, there is incredible political turmoil in Washington as a result of Republican Scott Brown being elected to the U.S. Senate last Tuesday.

For example, last Thursday and Friday, President Obama made prominent speeches calling legislative and regulatory changes that would force major banks to divest their investment trading operations.

It is ironic that the major architect of the changes in the law that expanded the ability of banks to engage in such investment activities is Larry Summers, who serves as Obama’s director of the National Economic Council. If Obama has suddenly reversed course to oppose Summer’s policy, does that mean that Summers will soon lose his job?

If major banks really do have to separate their investment operations, does that mean that the more than $100 billion of gold derivatives contracts that they hold as part of helping the U.S. government suppress the price of gold will have to be unwound? If so, where will the banks find enough gold (and also more than $9 billion in silver, platinum and palladium derivatives) to close out these contracts? No matter how President Obama’s call for major banks to divest their investment trading operations, I don’t really expect them to be forced to undo such contracts. But the fear that some positions may have to be unwound could cause precious metals prices to skyrocket.

In general, the mainstream financial media is only offering surface information on what has really happened in the gold market, and seeing what is likely to happen soon. Ask yourself which of the above information you obtained through your normal sources. If your usual sources of information about the precious metals markets don’t understand what is really happening, then how likely are their future forecasts to be accurate?

Take advantage of what I see as a current bargain buying opportunity to add to your gold and silver positions. The gold market will certainly be exciting in 2010. Stay tuned for developments.


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