Numismatic News
By
August 24, 2010
The week ended Aug. 11 was the 15th consecutive week where domestic stock mutual funds experienced a net outflow of investor money. This is the longest streak of weekly outflows since the compilation of these statistics began.
In the six weeks from the beginning of July through Aug. 11, during which there was a surprising surge in stock prices, total net investor withdrawals (calculated as new investment cash received less cash withdrawals) exceeded $17 billion. Since the beginning of 2010, the domestic stock mutual funds have lost a combined total of almost $48 billion.
I suspect that almost all of these outflows are going into some other kinds of investments. The largest category possibly benefitting from this reallocation is U.S. Treasury debt. A significant percentage may also be going into foreign stocks, bonds and currencies. A small portion may be going into real estate and selected commodities. But, judging from the statements made by our customers, I know some of them are buying physical gold and silver.
Even if only 1 percent of the net outflows since the start of the year have been devoted to purchasing gold and silver, that would have a significant impact on the prices of precious metals. Annual gold mining output at current prices may be around $80-$90 billion. New silver mining output is less than $15 billion per year at today’s prices. So, a shift of $480 million from domestic stock mutual funds into gold and silver would have an impact.
The likelihood is that the amount of assets being shifted to precious metals is much higher than $480 million. For instance, last month the University of Texas Investment Management Co. revealed that it had reallocated $500 million away from other investments to buy gold.
I don’t know how much money investors have moved from other assets into gold and silver. My own company’s experience seems to be typical with what is happening with coin and bullion dealers across the country: retail activity is heavily lopsided in favor of the buyers. While retail liquidations have not stopped, neither have they kept pace with the soaring number of buyers.
Others have described to me recent tactics now practiced by deep-pocketed gold buyers. It was confirmed at the Commodity Futures Trading Commission hearings on gold and silver on March 25, 2010, that the London Bullion Market Association has only enough gold or silver to cover 1-3 percent of its open contracts (where theoretically the LBMA contracts are 100 percent backed by physical metals). Since then, some sophisticated buyers have been working with aggressive brokers (and sometimes insiders at the companies that are liable to make good on the contracts) to locate actual stockpiles of physical gold and silver stored on behalf of the LBMA. Once these metals are located, these buyers swoop down to the specific company to purchase exactly what is available for immediate delivery, before the staff of the selling company realizes the impact of losing more metal.
The eventual largest losers in such tactics will undoubtedly be the investors who think they own physical gold and silver that is stored in unallocated accounts. Under LBMA rules, owners of unallocated gold and silver are not treated as owners of the metal (no matter what the investors think). Instead, they are officially described as “unsecured creditors” of the company that is liable to fulfill their contracts. Should the company ultimately fail to make good on its open contracts, it will go bankrupt and leave the unsecured creditors last in line to receive compensation – if any.
Adrian Douglas issued a follow-up analysis to his essay, which I discussed last week. The second one points out that the 10 times that the price of gold showed its greatest declines from the beginning of 2001 through late 2008 have coincided with the greatest declines in daily prices between the London a.m. and p.m. fixes. Douglas interprets such movements as even more evidence of price suppression by major central banks and their trading partners.
Douglas then observed that since the Chinese revealed on April 24, 2009, that it had semi-secretly been aggressively accumulating gold reserves since 2003, the price suppression efforts had become more aggressive but had only limited very short-term successes.
Douglas is convinced that the gold sales by the International Monetary Fund and the Bank for International Settlements gold swaps this year represent last gasp manipulation efforts. He now anticipates that we are on the brink of near term major rises in gold and silver prices. I concur with his conclusion, though for many reasons in addition to those he cites in his two articles.
