GoldMoney's James Turk reports on getting real metal

9:30p ET Friday, October 10, 2008

Dear Friend of GATA and Gold:

As the market for actual gold and silver separates from the market for paper gold and silver, people are wondering how a major purchaser like GoldMoney.com is obtaining its metal. GoldMoney founder and GATA consultant James Turk provided an explanation in GATA Chairman Bill Murphy's "Midas" commentary tonight at LeMetropoleCafe.com, and it's appended here.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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By James Turk
GoldMoney.com
Friday, October 10, 2008

We are having record months at GoldMoney. Because of the shortages in coins and small bars, buyers are increasingly turning to us to buy metal, and we're now storing for our customers over $400 million of gold and silver that they own.

We buy gold and silver in the London and Zurich markets and we are daily replenishing this inventory, which we resell to our customers. All bars we purchase meet the standards of the London Bullion Market Association. There is no minimum or maximum transaction for our customers.

By buying gold and silver in the London and Zurich markets we are giving retail investors the opportunity to buy alongside big institutional firms operating in these markets and to gain the advantages of these markets -- deep liquidity and transparent pricing, and the LBMA is the highest standard of quality and integrity. All transactions in GoldMoney are for physical metal -- that is, no "paper" gold or "paper" silver. Regular audits of the metal confirm that the weight of gold and silver in the vaults is exactly equal to the quantity of gold and silver recorded in each customer's account, and these audits are available to our customers upon request.

So far the London and Zurich markets continue to operate without problems, but I sense some strains are developing. For example, in London we have had difficulty in locating "bonded" silver bars (those without the U.K.'s Value Added Tax). We have therefore had to change our London pricing to encourage our customers to buy silver in Zurich instead, where our markup over spot remains unchanged.

Importantly, the spot price in London and Zurich for both gold and silver remains consistent with the spot price of the Comex. There is no backwardation yet. I say "yet" purposefully. I am watching this relationship carefully because the big spike in gold lending rates in recent days suggests that backwardation could occur at any time.

Though I have always considered backwardation in gold and silver a theoretical possibility, I never thought it would happen in practice. Backwardation would mean that conditions are so stressed that buyers would be willing to pay more for metal at the spot price than a future price. It would mean, among other things, that the future markets have been discredited and buyers want the "real thing" and not someone's promise -- as the old saying goes, "a bird in hand is worth two in the bush," which is becoming an increasingly important strategy to avoid counterparty risk.

I suppose that one could reasonably argue that a backwardation of sorts is already occurring. The shortage of fabricated product has led to extraordinarily high premiums for coins and small bars. These high premiums for coins and small bars indicate that the spot price for the precious metals should be much higher.

The gold cartel can allow the shortage of fabricated product to happen and just simply make up excuses for it. Right now there is no doubt in my mind that they are instructing the U.S. Mint and other mints to blame the shortages on high demand. But the gold cartel cannot make excuses if shortages appear in the LBMA market. If they did, the game would be over, just like what happened in March 1968.

To keep the price low back then, central banks were supplying metal in the London and Zurich markets. When they stopped supplying metal that month, the result was the two-tiered gold price. The so-called "official price" (which is another way of saying the "gold cartel price") remained at $35, while the free-market price traded above that level because everyone recognized that $35 were worth less than 1 ounce of gold. The same thing is happening today, in that $900 are not worth 1 ounce of gold. So we are probably close to the point (probably just weeks away) when the gold cartel stops supplying metal in London and Zurich at these low prices. The question is: What comes next?

It is of course impossible to predict what the gold cartel has up its sleeve, but I sense that a big announcement by governments is coming soon. It is reasonable to expect an outcome like March 1968, in which case the free-market price of gold will soar.

Here's the important part for GoldMoney customers. They are purchasing metal based on the spot price in London and Zurich for both gold and silver. Thus they are able to buy metal without the huge premiums now being charged on eBay, for example, for fabricated product like coins and small bars. Using my Fear Index and other valuation models, I would argue that buying gold in London and Zurich today is like buying it back in February 1968 when it was still $35 and before the collapse of the London gold pool the following month.

There has been no change in my strategy, which I have been stating for years. I continue to recommend the ongoing accumulation of the precious metals. They remain undervalued.

I believe that there was an important change in sentiment this past week. Up until now gold was being liquidated along with most everything else. Gold is now rising (despite the gold cartel's best efforts to keep it capped) while most everything else is still being liquidated as the deleveraging digs deeper. That gold is now rising indicates that people who have managed to get liquid in recent weeks are now focusing on safety for their money. Consequently they are buying gold, and I expect this trend to continue.

Lastly, gold again probed overhead resistance today at the $920 level, but the gold cartel is obviously "circling the wagons" at that level. Plus, as I write, we are getting the usual late-Friday "bombing" in the paper markets. It reminds me of what happened at $325, $340, $430, $500, and $700. Of course all those levels were taken out eventually, and I expect $920 to be exceeded too. It may not happen today or even this month. But I'm sticking with my year-end forecast of $1,100-$1,200 for gold, which looks reasonable to me given the rush out of financial assets and the search for a safe haven. Gold is of course the safest haven of them all. Silver is more volatile, but it's safe too for the same reason -- physical gold and silver do not have counterparty risk.

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