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Market Call Tonight:

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Jaime Carrasco, Investment Advisor, Macquarie Private Wealth

FOCUS: Energy, Materials, Utilties Stocks & REITs

Market Outlook:
Paper gold price was smashed once again by selling the equivalent of 2700 tons of paper gold in two days. However, this selling had a completely adverse effect intended by the sellers as it accelerating the already depleting global stocks of physical PM. Investors around the world realized that a 20 percent sale on the price was a really good deal. If somebody was trying to scare investors away they did not succeed.

From my vantage point this is to be expected as we see the beginning of the disconnect between the price of paper gold and physical gold. I have always said that as we proceed through this paradigm power shift this disconnect would accelerate as global powers begin to ask for their physical inventories back. Case in point, Cyprus cannot sell it's gold to cover their debts until they unwind their leasing agreements with the bullion banks; buy it back.

In essence the music is stopping in this global game of musical chairs involving 100 players and only 10 golden chairs. The first round started last year as Germany asked for 300 tons back from the New York Fed, this amount was only one-fifth of the gold that is supposedly stored in New York, and it will take seven years to deliver. How in gods name will the sellers of 2700 paper tons ever deliver when it will take seven years to deliver 300 tons to Germany? Truth be told the gold is not there and it must be purchased back. We saw further evidence of this four weeks ago when ABN Amro nullified all their gold certificates, stating that they will not be converting to physical even though the holders had been paying a storage fee. Going forward the holders of those contracts will only settle in cash for the paper price.

Further stresses in the physical market arose a week later when some European politicians started asking that Cyprus sell it's gold in order to pay for some of their debts. This was quickly countered by Mario Draghi, head of the European Central Bank, who said that politicians should not be hasty as central bank gold is only to be used when the central banks get in trouble. What he was really saying was that we should not go there because the gold has already been sold. These strains in the physical market were next followed by the shut down of the Pascua Lama project in Chile and the massive land slide at the Kennecotte Copper mine in Utah, one of the worlds largest mines, shutting down 10 percent of the U.S.'s silver supply, and 5 percent of the U.S.'s gold supply. Lastly we also saw a massive 20 percent reduction of COMEX gold inventories in March as more and more physical transfers from East to West, as evidenced by the 350 tons delivered to Asian markets that month. The drains in physical inventories will only accelerate this month due to increasing global purchases by individual investors and Eastern Central Banks, global mints are currently reporting shortages, the premiums of physical are increasing, and the biggest global refiners are reporting greater and greater waiting periods for delivery.

Until Q1 2013 the realities of the physical market were driven by accelerated demand from Developing Economies Central Banks, as they have continually purchased and amass physical inventories in their own countries. Going forward the demands on the physical market will only accelerate as Western Central Banks are forced to unwind their leasing agreements to meet their fiscal realities. Just like in 2008 I once again stand with a contrarian opinion to my peers, and feel that this correction in the price of gold will be quickly countered by the realities of the physical market. As the music stops Western central banks will be scrambling to buy back their gold in a very tight global market, of which 40 percent is currently controlled by the BRICS nations. Thus one of the main focuses of my practice, gold and silver producers in the Americas.