Jim Sinclair: The bullion market vs. the paper gold market

By Jim Sinclair
www.JSMineSet.com
Sunday, October 19, 2008

It is axiomatic that the most leveraged gold market most often (95 percent of the time) sets the price of any cash market. First derivatives (listed futures) command price.

This remains true as long as the COMEX warehouse of gold is NOT meaningfully depleted by long gold contracts by taking delivery from the exchange warehouse.

As long as an exchange maintains a warehouse that historically overwhelms historical demand for delivery, then the first derivative, the COMEX listed gold future, will be the primary cause of price.

Taking delivery from the COMEX warehouse is not an easy process, as the system is designed not to violate your contract but to be a world-class pain in the ass. The COMEX requires re-assays, assuming that you wish to re-deliver. This then places another raving pain in the ass in your way.

The COMEX market is effectively an international 24-hour market as there is no location where you cannot buy or sell a COMEX clone.

Cash bullion gold, as opposed to the semi-cash markets that non-USA banks trade, is the only totally private means of buying and selling gold.

As currency problems increase, first the knowledgeable public such as you clean out the coin market.

This is the first time that the international coin markets have been cleaned out everywhere. This did not happen globally in the 1970s.

Large gold bars are still available in major markets but the backup inventory is getting low.

As long as the COMEX warehouse remains adequate and large bars still are available, the paper market, the leveraged COMEX market, will rule the price.

Only with a decline in COMEX warehouse inventories and a rundown in large bar supplies of the cash market will the cash bullion market command the price of the COMEX futures market.

It was not the buying by the Hunt Brothers that caused silver to move above $30 into the $50 area but rather the universal belief that the Hunts would take delivery, which would deplete or exceed the COMEX warehouse supply.

The war between paper gold and bullion gold is a war to determine which will take command of the price of gold, nothing more, nothing less. There will be no two markets trading at different prices. All this battle is about is if the bullion gold market is going to take the lead in making the singular price away from the traditional axiom that the most leveraged market makes the price.

I believe that bullion, in these most unique conditions, will command the one gold price, making it hard to impossible to manipulate the gold price via the paper gold market, as is the practice every day.

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