We are having record months in GoldMoney. Because of the...

We are having record months in 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 LBMA. 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 gain the advantages of these markets -- deep liquidity, transparent pricing, and the LBMA is the highest standard of quality/integrity. All transactions in GoldMoney are for physical metal (i.e., no 'paper' gold or 'paper' silver). Regular audits of the metal confirm that the weight of gold/silver in the vaults is exactly equal to the quantity of gold/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, we have had difficulty in locating in London 'bonded' silver bars (those without the UK'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 mark-up over spot remains unchanged.

Importantly, the spot price in London and Zurich for both gold and silver remains consistent with the spot price of 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 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 will have become 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 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 US Mint and other mints to blame the shortages on high demand. But the gold cartel cannot make excuses if shortages were to 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 2-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 thirty-five dollars were worth less than one ounce of gold. The same thing is happening today, in that nine-hundred dollars are not worth one 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 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. They are thus 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 de-leveraging digs deeper. The fact 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 eventually taken out, and I expect $920 to be exceeded too. It may not happen today, or even this month. But I'm sticking with my same year-end forecast of $1100-$1200 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.
Regards
James
www.goldmoney.com