With the world in the throes of an
unprecedented credit blowout, gold’s failure to crack $2000 barrier can
sometimes seem mystifying – the moreso as the
correction begun in 2011 stretches on, now into an eighth month. Gold has
acted more like wheat or corn than like money. Shouldn’t it reflect the
fact that dollars, euros and yen are available to an insatiable group of
borrowers, mainly large banks, at no cost and in practically unlimited
quantities? Indeed. And yet, lately, gold has been unable to muster the ire,
even, of crude oil, which appears to be gathering thrust for its first foray
above $120 since 2008. Meanwhile, Comex Gold has
been lazily backing and filling since last September. If gold is not
oblivious to the steady and relentless destruction of currencies, it seems unpersuaded that this is what the central banks are
accomplishing by design.
From a purely technical standpoint,
gold’s reluctance to get in gear with crude, and to start acting like
it knows what the central banks are up to, is not so mysterious. Let me
explain. I have written here many times that it is not bullish buying that
drives stocks relentlessly higher in bull markets, but short-covering by
bears. This was a dynamic I got to observe first-hand in the dozen or so
years I spent on the trading floor of the Pacific Exchange. While bulls often
rationalize their buying strategies by citing “fundamentals,”
they probably understand at a gut level that PE ratios are no more useful a
predictor of where a stock will be trading in six months than tea leaves.
Small wonder, then, that bullish sentiment alone cannot summon the kind of
torpedoes-be-damned buying it takes to drive shares through massive levels of
supply. But short-covering can, since the buying is rooted in the primal fear
of losing money as a stock or commodity that one has bet against surges
Who Is Short?
Unfortunately for gold bulls, this fear
is nowhere to be found in bullion markets. Think about it. Who are the
shorts? Mainly, bullion bankers with friends in the very highest places.
Shorting “paper” gold amounts to free money for them because, in
a pinch, to cover short-term obligations, they can borrow as much of the real
stuff as they need from their good friends at the Fed, which holds a reported
7000 tonnes of the stuff for its friends.
They are all aggressively united behind a monetary agenda of their own
– one that is not particularly friendly toward $2000+ gold. Even so,
and despite the ability of the bullion bankers to gin up a hundred times as
much paper gold as their exists physical, quotes
have muscled their way higher nontheless. Had
officialdom’s suppression of the gold price been more successful,
prices would currently be languishing below $500 an ounce. Instead, gold has
traded as high as $1928, its ascent managed so as to avoid a day of reckoning
for bullion bankers. The easy money is still on the short side, and so it
shall remain as long as Morgan Stanley, J.P. Morgan and their ilk can collude behind-the-scences with
government to hold prices down. This alliance has proven remarkably effective
– so much so that gold (and silver) have gotten cold-cocked at exactly
those times when we might have expected paper shorts to get blown out of the
water. One of these days, in response to a financial cataclysm whose
dimensions cannot be precisely foreseen, those on the other side of the trade
will press their claims for physical gold. We shouldn’t kid ourselves
that The Powers That Be do not have a plan in place to turn back the mob.
Although that might briefly appear to save the day for J.P. Morgan et al., it
is not likely to save the financial system, nor perhaps even the Republic.