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woensdag 25 maart 2020 - 20:00 Paper Gold vs Physical Gold - Craig Hemke

March 25, 2020

The old adage is: "If you don't hold it, you don't own it". While that's not necessarily true if you're dealing with trusted storage companies, it is 100% true if you're dealing with untrustworthy Bullion Banks in London, Zurich, and elsewhere.

As I type this on Tuesday, March 24, we are seeing an unusual confluence of events overwhelm the global gold market:

1. The U.S. Federal Reserve announced yesterday that they will now provide "unlimited quantitative easing" to combat the financial contractions related to the coronavirus. This is what we've known was an eventuality for the past decade...QE∞.

2. This news, plus the recent crash in prices, has led to a surge in physical demand.

3. And this comes at a time when refineries are halting production in an effort to fight coronavirus on a local level.

A perfect storm, so to speak. See the anecdotal evidence below:

So what's going on here? As I type, there is a MAJOR disconnect between the spot price (evidenced as XAU) and the front-month COMEX contract of Apr20. Arbitrageurs have closed the gap today from $70 to the $36 shown below, but there's still a long way to go.

For the current digital derivative and fractional reserve pricing scheme to keep going, the gap between spot and futures must close—either by Apr20 falling, spot rising, or a combination of both. IF THIS FAILS TO HAPPEN, The Bullion Banks will have a major problem on their hands.


You've no doubt noticed that dealers are swamped as physical demand related to price, virus fears, and QE∞ has emptied physical inventory around the planet. What price do you charge your customers for their new orders? With physical production offline, how are you supposed to know? And how do you hedge your risk if this requires a functioning derivative market?

Digital arbitrageurs may work to close the gap between futures and spot today, but for this to work long-term, you'll need a fully-functional and trustworthy delivery market. How long before one returns? What if futures contract demand sends the Apr20 (or Jun20) price even higher? Will spot be forced to keep up?

The answers to all of these questions are unknowable as I type.

What we DO KNOW is that, just like The London Gold Pool failed in spectacular fashion in 1968, so will the current COMEX/LBMA Gold Pool fail at some point in the future. Why? Because confidence in the over-leveraged, unallocated, and just-in-time delivery system of "musical chairs" will crack and dissolve in a true physical delivery crisis.

Could this time be upon us? Maybe. It just might be. It's also possible that The Banks will be able to hold their system together through this crisis. Time will tell. Just be glad you've heeded the warning from this space over the years. Only physical gold can truly protect your wealth through the eventual crisis and monetary reset. If you have some...great. If you don' might try to find some before the music stops playing and the scramble for seats begins.

About Sprott Money

Specializing in the sale of bullion, bullion storage and precious metals registered investments, there’s a reason Sprott Money is called “The Most Trusted Name in Precious Metals”.

Since 2008, our customers have trusted us to provide guidance, education, and superior customer service as we help build their holdings in precious metals—no matter the size of the portfolio. Chairman, Eric Sprott, and President, Larisa Sprott, are proud to head up one of the most well-known and reputable precious metal firms in North America. Learn more about Sprott Money.

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found at, an online community for precious metal investors.

The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.You may copy, link to or quote from the above for your use only, provided that proper attribution to the source and author is given and you do not modify the content. Click Here to read our Article Syndication Policy.

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