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Welcome to the May 2014 edition of my monthly Gold Letter.

Talk of gold price manipulation has become a notoriously heated topic amongst precious metals investors over the past several years. This week's news that Deutsche Bank has abandoned its seat on the London gold fix has only added fuel to the conspiracy fire. For the first time, I give a detailed view of the leading conspiracy theories and how they impact my long-term investment outlook.

Of course, gold isn't the only precious metal skeptics have been closely watching. Many argue that silver has entered a bear market. Jeff Clark's guest commentary lays out the big picture case for the silver bull market in the coming years, writing from the viewpoint of the white metal itself.

We round out this Gold Letter with our regular features:
  • Lampoon the System suggests China has not been completely upfront about its gold reserves.

  • Our FAQ provides an easy reference table for comparing 24-karat and 22-karat gold coins, a very common question from our clients.

  • We wrap up with summaries of key metals news from last month.
Cordially,

Peter Schiff
Chairman
Euro Pacific Precious Metals
THE GOLD PRICE IS FIXED. SO WHAT?
By Peter Schiff

Peter Schiff

We can't ignore it anymore - the markets are rigged. The LIBOR scandal broke almost two years ago, and the banks found responsible for manipulating that key index are still dealing with lawsuits. Meanwhile, allegations of gold market manipulation have been simmering for over a decade and grew into an inferno after the spot price dropped dramatically last spring.

 

Yet I'm left wondering what the conspiracy theorists hope to accomplish. Yes, I believe in exposing truth for its own sake and that the individual investor should have the same opportunities in the marketplace as the big institutions. But with these conspiracists, there is often a subtext of, "Because the price is suppressed, buying gold is for suckers." I think this conclusion is precisely wrong.

 

Even if banks and governments are manipulating the day-to-day price of gold, the metal's long-term fundamentals are stronger than ever. In fact, the reasons for them to suppress the gold price are the same reasons for us to buy gold in the first place.

 

Let's examine what large institutions may be doing to the gold price and how that affects the long-term gold investor.

 

Flash Crashes

 

There are two prominent suspected methods of gold price manipulation. The first is through massive short-selling of COMEX gold futures in the United States. Paul Craig Roberts, former Assistant Secretary of the Treasury under Reagan, is perhaps the best-respected voice calling attention to this controversy.

 

Roberts argues that large banks, like JP Morgan and Goldman Sachs, wait for periods of low activity in the gold futures market to sell large quantities of futures contracts. This selling drives down the actual spot price of gold, which in turn scares away weak longs and encourages other short-sellers to join in on the action.

 

These "mini-flash crashes," as they've come to be known, allegedly knock gold down a peg or two right when it is primed for a rally - thereby stealing its momentum. More importantly, Roberts claims, these flash crashes provide support for the US dollar when it looks weak.

 

The most recent example is a series of mini-flash crashes in March, when the US Dollar Index dropped below the key level of 80. Gold was steadily rising towards $1,400, but after the attack, began falling again. Sure enough, the Dollar Index recovered above 80.

 

The Foggy London Fix

 

The other suspected method of gold price suppression is through the London gold fix. This set price is used by large gold owners, including refineries, miners, and central banks, to account for the value of their holdings.The London fix has been around since 1919 and is so old-fashioned it's no wonder it's coming under more scrutiny.

 

Five member banks of the London Bullion Market Association get on the phone every weekday at 10:30 am and 3 pm London time. They discuss how much gold they and their clients want to buy or sell, then adjust the price until the buy and sell orders are within 50 gold bars of each other. The price is then "fixed" for publication in US dollars, British pounds, and euros.

 

The whole process can take anywhere from few minutes to over an hour. At any time, the member banks can pause the proceedings to speak with clients. This basically means that information about the gold price trickles into the general market before the fix is officially set.

 

Economists and academic researchers have begun looking into irregular gold price movements during the afternoon fix, which might indicate collusion to drive gold down. Researchers found that between 2004 and 2013, whenever the gold price made a large move during the afternoon fix, two-thirds of the time it was a decline.

 

The UK Financial Conduct Authority has started investigating the London fix more closely, while earlier this year a US lawsuit was filed against the five member banks based upon this research. Tellingly, Deutsche Bank has resigned its seat on both the gold and silver fixing boards. While such a seat sold for a million dollars during the last transfer a decade ago, apparently it is now given up for free. 

 

If That's the Fix, Where's the Catch?

 

I certainly cannot argue that flash crashes and private phone calls between bankers are not suspicious. But what's the real takeaway for the physical gold investor?

 

The evidence of manipulation for both COMEX gold futures and the London fix are large, downward movements in the price of gold at suspicious times of the trading day. More than anyone else, this is going to affect gold speculators who are looking to turn a quick profit.  

 

I've always warned serious investors against the risky world of gold futures and other paper gold derivatives. Besides the complexity of the market itself, attempting to become a short-term trader puts the small investor in a league with powerful interests and shady practices. As the father of value investing Benjamin Graham was known to say, "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." This means that short-term, the market is like an election or other popularity contest - with all the corruption that implies. But over time, what matters most is underlying value.

 

[My views on the present undervaluation of gold are well established, so I won't re-hash them here. For those curious, please read through past editions of my newsletter.]

 

The important question is: could these manipulations affect the long-term value of gold?

 

The Big Picture

 

The research suggests that London fix manipulation could have been occurring since 2004. So the claim is that throughout gold's greatest bull market in living memory, banks were colluding to drive the price lower. Clearly they were incapable of stopping gold's rise altogether, if that was truly their intention.

 

I think it is more likely that either they were simply trying to game the market to buy gold at a discount for their clients, or perhaps they had a vested interest in slowing gold's rise.

 

Since gold is still widely recognized as a safe haven, investors use it as a gauge of the health of the underlying economy. If gold shot up too quickly, these banks may have reasoned, it could trigger a panic flight from fiat currencies.

 

In fact, that is what happened in the credit crisis of '07-'08. As we saw, major Western banks quickly turned from highly profitable to completely insolvent. Since then, coordinated government intervention has done its best to re-create the tenuous situation prior to the crash - so the incentive to suppress gold remains.

 

Paul Craig Roberts has made the same point - the gold price is being manipulated to make the dollar appear stronger, rather than to cripple the gold market. If over the last several years, the Dollar Index had continuously fallen and the gold price steadily risen, it would have undermined the Federal Reserve's claims that quantitative easing had saved us from the brink of collapse. Viewed this way, a self-interested collusion between major banks and their patrons in government makes sense. Imagine if you were facing the destruction of your wealth, power, and status - and had the means to forestall it.

 

Fortunately for gold investors, forestalling is not the same as correcting. Just as any manipulation prior to the credit crisis didn't prevent it from occurring, today's tactics will not lessen massive public debts nor return value to an inflated currency.

 

A Second Chance

 

If gold price manipulation is true, then these banks and governments have done a tremendous favor to those who understand the gold market. Unexpected volatility and bull market corrections shake out those speculators who are trying to make a quick buck or who do not have the courage of their convictions. Investors have been given a multi-year free pass to learn about monetary policy, commodities, and investing while gold waits at affordable prices to be bought.

 

Perhaps absent these manipulations, gold would have grown into a frenzied mania as the whole Western world attempted to safeguard their wealth at once. In fact, I believe this is a likely outcome as the various schemes that are keeping the West afloat start to come apart.

 

If you're skeptical of big banks and big government, gold manipulation shouldn't put you off investing in sound money. Instead, consider it as you would a gift horse. Instead of looking it thoroughly in the mouth, smile and graciously accept your good fortune.


Peter Schiff is Chairman of Euro Pacific Precious Metals.

If you would like more information about Euro Pacific Precious Metals, click here. For the fastest service, call 1-888-GOLD-160.
THE FORCE IS STRONG WITH THIS ONE

(Click to enlarge)

Jon Pawelko publishes the web comic Lampoon The System to poke fun at insane economic policies and educate the public on sound economics.

Click here for more cartoons and information on his anthology book, available for only $15.
LISTEN, SILVER - WE NEED TO TALK 
By Jeff Clark of Casey Research

I wrote to Silver last week, and she answered back. I'd like to share our correspondence with you.
 
Dear Silver,

Happy anniversary. It was on April 25, 2011 that you hit $49.80 per ounce in the New York spot market. Today, three years later, you sell for around $20, nearly 60% less. Is your bear market almost over, or are these low prices here to stay? Your price has lagged gold this year, so your normal volatility is lacking. How much longer will you be stuck?

Sincerely,
Jeff Clark


Here's her polite response:

Dear Mr. Clark,

I have good news for you. While some investors have lost interest in me, and my price is at 2010 levels, things will soon change.


I put together this historical chart for you, and I hope you'll share it with your fellow silver investors. It shows every major bear market over the past four decades. The black line represents what's taken place from April 2011 through last Friday.

 (Click to enlarge)
 
Of the seven prior bear markets, four lasted longer and three were shorter. Four declined less than today; two were about the same; and only one was significantly deeper.

If I were to match the two longest bear markets, my price would stay down until this October. If it matched the other two longer bear markets, it would end this summer.

Over the past 40 years, there has been no bear market that would extend my low past this October.

Or my low may already be in.

Either way, I think it's safe to say that I'm close to the end of my down cycle. In fact, the historical data say the opportunity to buy me at $20 or less will soon be unavailable.

Let me relay some other data to you that also signal current prices can't last too much longer.

The US Mint (Still) Can't Keep Up with Demand

The sharp drop in my price in 2013 unleashed a wave of pent-up demand for silver coins. Look at the response from investors:

 
(Click to enlarge)

The question this year is if those record levels could continue to be supported. The first quarter is over, so I can tell you the answer.

The US Mint sold 13,879,000 ounces of me in Q1, 2.4% less than the 14,223,000 sold in the first quarter last year. Here's the monthly breakdown:

(Click to enlarge)

January's 36% decline from the prior year looks big, but it's not what you think - the Mint didn't begin sales until the end of the second week of the month. The monthly total thus reflects only 2.5 weeks of sales.

On the other hand, March sales were the fourth-biggest month ever. Add in April's sales figures, and the US Mint is now on pace to exceed 2013 totals.

It's clear that your fellow investors think my price will go higher.

Silver ETFs Have Net Inflows (Again)

You might remember that holdings of silver Exchange Traded Funds (ETFs) were largely flat last year, unlike the mass exodus seen in gold funds. That pattern continues this year.

Holdings in my exchange-traded products (ETPs) have risen 3.5% year-to-date, an additional 17.5 million ounces. In fact, the net purchases by silver ETPs have totaled $354 million YTD, the largest influx of all commodity ETPs!

Meanwhile, gold-backed ETPs have seen sales of 500,000 ounces, about a 1% drop.

Jewelers Love Low Prices

Low prices for me have led to increased silver jewelry purchases.

As just one example, the UK reports that silver jewelry sales jumped 40.4% in February, to 351,791 items.

India Just Won't Stop Buying

India imported 5,500 metric tons of me last year, 180% more than 2012. Indian imports comprised 20% of all global demand.

Last month's silver imports were 250% lower. This was mostly due to the recent increase in import duties and the fact that six banks got permission to import gold, which would soften purchases of me. This could partly explain why my price has struggled.

But as long as politicians keep gold restrictions in place, Indians will continue to buy me.

China: More Silver for Solar


Chinese imports of me rose drastically in February, up by 75% month-over-month and 90% year-over-year to 358 metric tons, the highest since March 2011. Though lower the following month, March imports were up 16% YoY. China's solar industry is growing explosively. In 2009, it represented about 0.2% of the global market; this year, it's estimated to be one-third.

It's interesting to note that my price rose in February and fell in March, which suggests that Chinese demand affects my price, too.

Supply Sources Are Concerning

So far, suppliers have managed to meet demand. However, there are dark clouds on the horizon.
  • Very little excess supply is expected this year, as production is projected to remain flat, and demand shows no signs of letting up.

  • Solar power accounted for 29% of added electricity capacity in America last year. "More solar has been installed in the US in the past 18 months than in 30 years," says the US Solar Energy Industries Association. "Eventually solar will become so large that there will be consequences everywhere."

  • Supply from recycling will probably be weak, because it's not cost effective to recover every tiny bit of me from cellphones or prescription eyewear or casino chips. One report says that Americans threw away 130 million cellphones last year, containing over 46 metric tons of me.

  • Several major base-metals mines are expected to be depleted over the next several years. The problem is that two-thirds of me is a byproduct from base-metals operations. If their output falls, there will be less of me, as well.

  • The Silver Institute says that demand for industrial products made from me continues to grow.
No Regrets

As I look at your current situation from a historical perspective, I see a lot of catalysts that will catapult my price higher in the near future. It seems rather clear that as demand continues to grow, supply tightens, and my role as money grows more substantial, I will trade at much higher levels in just a few short years.

In fact, I offered to bet my cousin gold that I will outperform him before this cycle is over. He declined to take the bet.

Your friend,

Silver

Jeff Clark is the editor of BIG GOLD, Casey Research's monthly advisory on gold, silver, and large-cap precious metals stocks.

Worried about your dollar dominated assets and want to know more how to diversify your wealth outside of the US? Check out Casey's free webinar, Internationalizing Your Assets, featuring Peter Schiff.
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Which type of coin should you buy? That's a question of personal preference more than anything - all of the coins listed in the table below are well-respected forms of gold bullion that will hold their value over the long-term.

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THIS MONTH IN GOLD

Deutsche Bank Resigns London Fix Seat
Reuters - Deutsche Bank has resigned its seat on the London gold and silver fixes as part of a larger decision to end the majority of its commodities-related business. Deutsche Bank could find no buyer for its seat, perhaps due in part to a US lawsuit that accuses the five London gold fix banks of price-rigging. Deutsche Bank has held its position on the fixes for two decades and officially leaves on May 13th. Just four banks will be left to set the gold fix - Barclays, HSBC, Bank of Nova Scotia, and Societe Generale. Just two - HSBC and Bank of Nova Scotia - remain to set the silver fix. 
Read Full Article>>

China Gold Demand to Grow 25%
Bloomberg - Chinese gold demand will grow 25% by 2017, according to the World Gold Council. Last year, China's gold consumption rose 32% to 1,065.8 metric tons, and an expanding economy with higher personal incomes will support further growth. China's economy is expected to grow 7.4% this year - more than double the forecast for US growth. The middle class is predicted to expand more than 60% in the next six years to 500 million people. Current household gold holdings are about $300 billion. China made up 28% of global gold use last year. 

China Allows Beijing Gold Imports & Shanghai Gold Leasing
Reuters & Bloomberg - China is now permitting gold imports through Beijing in the first quarter, making it the third domestic point of entry for the metal after Shenzhen and Shanghai. Industry sources believe the PRC is trying to discreetly boost its official reserves without disclosing how much gold it is buying by circumventing trade with Hong Kong. Meanwhile, the Shanghai Gold Exchange will begin gold leasing in the first half of 2014. With a growing number of participants in the Chinese gold lending market, the exchange wants "to set up a platform to help standardize the deals and lower transactions costs." Both moves signal that China continues on a path of liberalizing precious metals markets.

Platinum & Palladium to Rise on Supply Constraints
Wall Street Journal - Platinum and palladium prices are expected to rise on increased supply and demand pressures. The use of the metals in catalytic converters accounts for 37% and 72% of global demand for platinum and palladium respectively. HSBC predicts demand for palladium to be 1.06 million ounces more than supply in 2014. Limited supply for both metals is due to issues in Russia and South Africa. Russia accounts for 40% of the world's palladium, and analysts believe it has nearly depleted its reserves. A 3-month strike in South Africa has cost metal producers at least 500,000 ounces of platinum and 100,000 ounces of palladium. South Africa supplies the world with 80% of its platinum and 37% of its palladium.

US GDP Growth Almost Zero in First Quarter
Wall Street Journal - The US economy grew at a seasonally adjusted 0.1% in the first quarter of 2014, according to the Commerce Department. Poor weather and low overseas exports are being blamed. Business spending on equipment, buildings, and intellectual property saw their first declines in a year. US exports saw their largest drop since the end of the recession, falling 7.6% over the quarter. Residential fixed investment, such as home improvements, saw a second straight quarterly decline.
starbust 5
In This Issue
The Gold Price is Fixed. So What?
- Peter Schiff
The Force Is Strong With This One
- Lampoon the System
Listen, Silver - We Need to Talk
- Jeff Clark
Questions From Our Customers
This Month in Gold
Quick Links