Precious Metal and Precious Little Time

The butterfly effect, illustrating how minor changes can lead to significant outcomes, is particularly evident in the financial markets, especially within the realm of precious metals. This past weekend, I wrote about our discovery, in the early 2000s at Sprott Asset Management, into the silver market that highlighted a massive discrepancy between what was promised and what physically existed, a precursor to market squeezes and manipulation. That being, 5 day Silver Certificates took 6-9 months to deliver.

This aligned with John Embry’s warnings in 2004 when he wrote “Not Free, Not Fair” about orchestrated gold price suppression, providing a historical context for today’s market dynamics. At that time, most mainstream financial reporters dismissed our findings as quackery and conspiracy theory.

Subsequently, over the decade from 2010 to 2020, five of the world’s largest banks faced significant fines for manipulating precious metals markets, yet these penalties were minimal compared to their overall profits:

• JPMorgan Chase paid the largest fine of $920.2 million in 2020 for “spoofing” trades in precious metals markets, while earning approximately $250 billion in profits over the decade.
• Bank of Nova Scotia was fined $127.4 million for futures manipulation against decade profits of roughly $85 billion.
• Deutsche Bank paid $98 million for gold and silver price manipulation while generating about $40 billion in profits.
• HSBC’s $100 million fine for precious metals manipulation was a fraction of their $150 billion decade earnings.
• Bank of America/Merrill Lynch paid $25 million for precious metals spoofing against approximately $170 billion in profits.

In total, these five institutions paid about $1.27 billion in fines while collectively earning around $695 billion in profits during this period, meaning the fines represented just 0.18% of their earnings. The relatively small size of these penalties compared to profits helps explain why rules seem to be broken repeatedly even after initial regulatory actions. Perhaps, industry insiders just consider the fines as a routine cost of doing business rather than a true deterrent.

Market Manipulation, Physical Scarcity, and Lease Rates

The current crisis with the Bank of England’s gold delivery delays serves as a modern echo of these historical manipulations. According to posts on X and confirmed by the Financial Times, the wait for gold delivery has extended significantly, suggesting liquidity issues or physical scarcity. This situation is compounded by the recent spike in gold and silver lease rates, indicating a scramble by market participants to meet delivery obligations, or at least a willingness and need to pay significant premiums to borrow physical metals. In the past, spikes in lease rates have often been followed by rapidly rising metal prices, sometimes by 50% or more within a year.

However, any central bank, bullion bank, or even a large trader can manipulate market perceptions through the creation of unbacked paper contracts on commodity exchanges or by shorting physically backed ETFs, creating an illusion of supply. This practice results in a stark disparity between the physical gold and silver in existence and what investors believe they own.

Physical metals are inherently valuable due to the energy and labor required for their extraction, unlike paper contracts which, as I’ve often said, “only cost keystrokes” and they will also prove to be as elusive to enforce as accountability is to find in government.

Implications for the Market and Society

When it becomes clear that the physical delivery of gold and silver against these contracts is unattainable the prices of each will explode higher and those caught short could easily risk insolvency. But, regulators are likely to side, as they always do, with the banks, offering an out for them via cash settlements instead of demanding they complete physical delivery as contracted. This will further entrench the history of governments favoring large financial institutions over individuals. These sorts of bailouts, remove accountability, trigger increased inflation, erode savings and devalue wages. Ultimately, it all leads to a flight to precious metals and related gold and silver equities. Queue the hyper feedback loop of skyward moving precious metals, just like the 1970 when gold went up 25x. Or perhaps it will be more like the 2000’s…

Performance from 2000 Lows to 2011 Highs

The precious metals market from 2000 to 2011 demonstrated the potential for substantial gains:

• Gold increased from approximately $250 per ounce to $1,900, a 650% rise.
• Silver climbed from $4 to $48 per ounce, a +1000% increase.
• The HUI Index (Gold Bugs Index) jumped from 35 to over 600, a nearly 20-fold increase, showcasing the volatility and leverage in gold mining stocks.

A Personal Leap of Faith

Around the year 2000, I made a career shift from tech consultant to stock trader to resource investor, motivated by a belief in the upcoming boom in precious metals and bear market forming in the Nasdaq. This decision, echoing the butterfly effect in my life, led me to join Sprott to capitalize on resource stocks while also shorting the overhyped tech sector, and then earning the freedom to spend the last decade just managing my own funds.

Yesterday Once More…

The current situation with gold and silver, marked by delivery delays and spiking lease rates, underscores deep systemic issues. We are witnessing a major tipping point, and we are once again on the cusp of a significant reevaluation of financial assets vs physical assets, and this time led by foreign central banks with China at the forefront.

This scenario emphasizes the need for vigilance and a critical examination of how financial markets operate, especially given the risks faced by the middle class.

When this next gold and silver bull market goes into full swing, the actions of many attempting to buy even one coin could create a tsunami that washes over our financial system, revealing the harsh reality of having created too much money – far too much money, alongside all the ridiculous meme coins, which aren’t worth the keystrokes it takes to make them.

The parallels between now and 2000 are abundant. I could write a book on it…and just might. For now, I’ll end this article by emphasizing that my bullishness on silver, gold, and other commodities exceeds even my strong conviction from 2000. Similarly, my bearish outlook on tech and crypto today surpasses my negative stance on tech stocks and dot.coms back then – and I was proven right about both the tech crash and the resource boom. History doesn’t just echo; sometimes it shouts at us.