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We are now 3 weeks out from the paper massacre of the gold and silver prices.  We immediately saw (as in THE first day) massive physical demand from all over the world explode as shortages and premiums in gold (and particularly silver) came about.  The stretching of delivery (if even available) times and increases in premiums over “spot” prices came about from day one and so far show no signs of easing.  “Is this the one?”  Do the paper and physical markets separate from here further or do they converge again?

I obviously don’t know the answer to this and personally didn’t think that we could have time wise even lasted to this point but what is happening now shows just how fragile the supply chain really is.  You can look at this from front to back or back to front to see the supply chain.  The mines mine ore and then pour dore, the refiners refine the dore and then mint coins and bars, then the coin dealers get product and it’s sold.  The problem is this; the mines only (in gold’s case) produce 2,500 tons per year.  There are no recent “big finds” and have not been for at least 10 years or more.  There are no big projects (especially now that Barrick’s Pascua Lama project is tied up) coming on stream to sufficiently increase supply.  Demand was 4,000 tons per year, now it is much greater because of the infinite wisdom of the paper market/makers smashing the price and unleashing global demand.  The refiners are working overtime and weekends to mint product to supply the dealers.  The dealers are now seeing demand unlike ever before; the question is now whether the demand abates, continues or even increases from here.

My point is this, the “paper smash” that was surely designed to SCARE investors away from the metals has done exactly the opposite.  It was in retrospect a mistake, big, HUGE!  Previous to take down 3 weeks ago we believed that the physical market was “fragile” at best, now we have proof that we were correct in this analysis.  Now the question becomes, “Can they put this back into the box?”  Can they calm the physical precious metals markets?  My guess is that they cannot unless… one of two or both of two things happens.  Some way, somehow “sufficient supply” must show up in the cash markets OR the price must rise (and by rise I mean dramatically) in order to ration out the existing supply.  I don’t see exactly “where” new supply will come from, as for price I don’t know at what levels buyers will turn back if they continue to see shortages.  What I mean is that nothing causes a buying panic greater than a shortage.  In other markets a shortage may be just an inconvenience, in gold and silver (because they are money) a shortage will in itself actually create higher demand because of the “emotions” involved.

Don’t get me wrong, we have seen “smack downs” in price many times over the last 13 years and only once (late 2008) did it lead to a buying frenzy and shortages.  For the most part these price assassinations have worked and made people think twice about their purchases.  I guess you could say that “it worked until it didn’t” and right now it’s clearly not working.  We seem to have crossed some type of barrier or line in the sand and the crowd mentality has changed.  Maybe it is simply the fact that there is so much more central bank created money sloshing around?  Maybe it is simply because enough people understand (and believe) the central banks when they say that they’ll pump another $2++ trillion into the system over the next 12 months?  Maybe it is because enough people who used to “believe” the far-fetched promises have finally tired and know that something “just ain’t right?”  Maybe enough people who used to think that something wasn’t right have finally decided to do something about it?  Maybe the zero percent or even negative interest rates are finally taking their toll?  What it is exactly we will probably never ever know for sure.

The very real danger now is that what has been started begins to snowball.  Human emotions are a very difficult thing to gauge and as I’ve written many times before, fear is the greatest emotion of all.  “Fear” can make people do both rational and irrational things and do them quickly and in a herd mentality.  The entire financial system when looked at with clear, historical and logical “glasses” on is just plain BROKE in every imaginable fashion.  We arrived 5 years ago at a point in history where almost anyone previously would have said “that can never happen” …and then we went 5 more years in the defiance of logic, common sense and Mother Nature.

A complete and total RUN on physical metal supplies and inventories has never ever been riper than it is now.  “Is this it?  Or can they put it back into the box until a later date?”  As I said before, I don’t know.  In reality it does not matter one way or the other because a complete wipeout of supply WILL mathematically happen either now or later.  Zeroing out interest rates and creating unlimited cash will assure this.  I will leave you with these questions.  Does it make sense to play “chicken” with you and your family’s financial life and bet that “now” is not the time?  Do you ETF, allocated and unallocated metals “owners” really believe that you are “special” and that your institution will make good and send you your metal when others cannot?  Do you not understand that just “requesting” delivery is in itself a form of current demand that was put off (until now) when your institution took your money but didn’t buy the metal?  Do you really believe that the biggest, most all-encompassing Ponzi scheme of all time will end any differently than all of the previous ones?  Maybe “now” isn’t “it,” betting against “it” in my opinion is foolish, reckless and will be something that if not prepared for… can never be recovered from.

By the way, we will know for sure when this is “it,” when industrial end users begin a mad scramble to secure product.  There will be no turning back once this final line in the sand is crossed!