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Turk:  “What is happening here in the gold market, Eric, is truly remarkable.  It is a situation that undoubtedly will go down in the history books.  Gold is now in its sixth week of backwardation.  When we first spoke about this on July 8th, and KWN broke the news that gold had backwardated, gold jumped $22 that day.

That initial jump was a reaction to a market situation that was not sustainable.  In other words, the backwardation clearly showed that physical gold priced at $1,200 was way too cheap.  So traders back then bought it hand-over-fist, and the gold price jumped 1.8% in just one day as a result....

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“Over the past 6 weeks gold has climbed an additional $100.  We are also continuing to see drawdowns in visible inventories as gold is relentlessly being shipped from West to East.  The bottom line is that people in the East understand gold’s monetary value, and this is why physical gold is heading East in record numbers.  Yet despite the higher price, gold still remains in backwardation which is simply astounding.

There is only one conclusion to draw from this situation, Eric:  Physical gold is still too cheap, even here at $1335.  Gold backwardation cannot happen in theory because physical gold cannot be “printed,” so its purchasing power cannot be inflated away by governments.  And because it is a tangible asset, physical gold does not have counterparty risk.

Because gold eliminates these two major risks that are inherent in all national currencies, gold's interest rate is always lower than the interest rate of even the strongest national currency.  Therefore, gold is always in contango when priced in national currencies.  Yet backwardation occurred at the lows in the gold price in 1999 and 2008.

So even if backwardation cannot happen in theory, the reality is that gold backwardation can happen as a consequence of government intervention.  These interventions are aimed at making gold look weak and national currencies look strong.  Just look at what happened to gold in April:  Didn't that big price drop, which was triggered by huge dumping in the futures market for paper gold, make gold look bad by scaring people out of it? 

Why isn't the CFTC investigating that 400 ton trade?  Because they know it was government intervention aimed at scaring people out of the gold market.  But the only result is that government intervention has unleashed a tidal wave of bargain hunting throughout the world.  Massive increased buying of physical gold has resulted in backwardation now that the weak-handed sellers in the West have been overpowered by the strong-handed buyers from the East.

It is important to note that while gold backwardation lasted a few days in 1999 and again in 2008 -- both of which marked major bottoms and key turning points in the price of gold -- we now have 31 trading days of backwardation and a gold price that has already risen $135 from when the backwardation began.  What we are seeing today is truly unprecedented and historic.

We can therefore conclude that the gold price has much further to rise, and the reason for this is very simple:  Because the supply of physical gold cannot be increased by “printing” as is done with national currencies, demand for gold must slacken.  And the only way for that to happen is for the price to rise, thereby enticing those who own physical gold to sell it and hold some national currency instead. 

But given the correction over the past two years and the big shakeout of the remaining weak hands in the West earlier this year, including the Western central banks that dumped 1,300 tons or more, today physical gold is now firmly in strong hands.”

Turk had this to say regarding silver:  “Silver is adding more fuel to the fire, Eric.  Note how it is finally outperforming gold.  So the gold/silver ratio has started falling once again, which is yet another piece of evidence that both precious metals have made an important low.

This is another indicator that the metals have begun new up-legs in their major multi-year bull markets.  And given the unprecedented backwardation in gold, investors should expect this up-leg in gold and silver to be spectacular.  Meaning, this move will be more remarkable than anything gold or silver have seen over the past 13 years.”

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© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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