Gold's Black Market?
By Staff News & Analysis - April 19, 2013

Meltdown? 15% of world's gold miners face collapse after plunge in price strips $169-billion off market value … Gold's 9.3% plunge on April 15, the biggest one-day drop in New York since March 1980, couldn't have come at a worse time for gold companies. Barrick Gold Corp. and Newmont Mining Corp., the world's two largest producers, are among companies in the FTSE Gold Mines Index that have collectively lost about US$169 billion in market value since bullion peaked in 2011. Gold equities are trading at the lowest level relative to gold. – National Post

Dominant Social Theme: It is getting grim out there .

Free-Market Analysis: So here is the conundrum: There are reports from all around the world that it is difficult to buy physical gold and silver.

Yet the price of gold has plunged by hundreds of dollars and now mining companies are getting ready to shut down.

What's that all about? Here's more from the article:

Gold producers, ignored as global stocks rebounded in the past two years and investors turned to exchange-traded funds that track bullion, face closing mines or shutting themselves down after the metal's worst slump in three decades this week made 15% of miners unprofitable …

Barrick took another hit this week when the cost to insure its debt surged to the highest in four years after Moody's Investors Service said it may downgrade the company's bonds.

The review of Barrick's Baa1 debt rating was prompted by a legal challenge to its US$8.5 billion project in the Andes, Moody's said in a statement. Toronto-based Barrick is the biggest producer of the precious metal with US$7.5 billion of bonds.

This month's futures price drop to as low as US$1,361.10 an ounce brings gold closer to the global average production cost of about US$1,200 an ounce, according to Nomura Holdings Inc. That puts producers such as Canada's Semafo Inc. and Golden Star Resources Ltd. at risk of mine closures or "financial distress" if prices fall to that level, according to Macquarie Group Ltd. Tanzania, Africa's fourth-largest gold-producer, said a sustained slump may shut mines there.

"Any company that hasn't been focused on efficiencies and costs for the last three to four years is going to fail in this market," said Gavin Thomas, chief executive officer of Sydney- based gold miner Kingsgate Consolidated Ltd.

Gold's 9.3% plunge on April 15, the biggest one-day drop in New York since March 1980, couldn't have come at a worse time for gold companies.

Despite 12 consecutive years of rising gold prices, shareholders have lost faith in the gold-mining industry, which has seen soaring production costs and made money-losing acquisitions. Investors have instead flocked to exchange-traded funds, or ETFs, such as the SPDR Gold Trust, which are backed by bullion and track the price of the metal.

Have investors really lost faith? We read that gold demand in Asia and India remains very strong and informal reports from gold buyers (for physical gold) seem to indicate that it is difficult to buy gold at any price. Silver, not much better.

One explanation for this would be that the paper market and the physical market are diverging. The paper market, according to those who see this crash as manipulated, is easy to push down. Illegal (yet tolerated) naked shorting and other sorts of paper manipulations are responsible for the price crash of the physical.

The physical market might reject these manipulations were it a mark-to-market operation. But it is not. The physical price of gold is apparently fixed twice a day by a consortium of wise men.

If it were simply a market operation perhaps physical gold would be higher, even much higher. But the wise men setting the price must have (apparently so) an affirmative obligation to consider the price information (manipulated or not) being generated by the paper-gold industry.

Thus, the wise men take into account paper gold indications even though the REAL physical market would not reflect them and would tend to emphasize scarcity.

By divorcing market-based physical prices from the "on the ground" reality of what is occurring, those fixing the price of physical gold are apparently giving a good deal of credence to the paper gold market, despite any manipulation that might be occurring.

The situation is further complicated by the inability of gold miners to divorce themselves from whatever price the London physical exchange sets. Gold and silver jewelry are in great demand and apparently many who want to buy gold cannot find it at any price.

Yet according to this article, gold miners are set to go out of business because the price of gold has slumped. In fact, it may not have slumped but apparently to go outside the "fixed" price of the London bullion exchange is nearly impossible.

Perhaps the problem is regulatory in nature. But in any case, it is a bizarre series of events we are witnessing. There is plenty of reporting that seems to indicate high demand for physical gold. But the "price" of gold is down regardless and even though miners might be able to sell their gold for prices high above the stated price, that is not currently happening.

Instead, many miners are preparing to shut down! In the end, if this analysis is correct even partially there will be a divergence from the paper market and gold and silver will generate prices unrecognized by the official marts.

In other words, not recognizing the reality of gold and silver and the actual supply and demand equation will tend to create gray and even black markets in the metals.

After Thoughts

Maybe this hasn't happened yet, but maybe it will if the demand actually exists and is not recognized by official prices.

Posted in Gold & Silver, STAFF NEWS & ANALYSIS
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