Based on some interactions with newer patrons of Le Café, I thought it
might be a good time to restate the general lay of the land in the gold
market. The occasion for this is the latest measure of what might
be called leverage in the futures market, what it is, and what it may or may
not mean and why.
Clearly the paper markets, involving associated trades in ETFs, mining
company stocks, derivatives, and so forth are much broader than the
futures market alone. But the futures market is what one
might call the locus of execution for our drama.
The potential claims number for gold at the NY Comex is calculated by
Nick Laird at Sharelynx.com by taking the
amount of gold bullion marked as 'registered' for delivery at current prices
by the number of contracts open on the futures market at 100 ounces of
gold per contract.
Yes there is more gold that the 373,000 ounces currently marked for
delivery in all the warehouses. But that gold is merely there in
storage by its owners, so counting it towards delivery, without the prior
consent of the owner, is a bit presumptuous to say the least. One might
safely assume that market rules apply, and more gold will become deliverable
at higher prices.
With a potential 111 claims per ounce of gold marked 'registered' for
delivery at these prices, one might expect to see quite a move higher in
prices to reach a market clearing price, and perhaps even a
significant short squeeze.
But we probably will not see any such short squeeze, and maybe not even
a breakout from this price range, unless something unusual happens
outside of the New York and London markets.
The Comex, aka The Bucket Shop on the Hudson, does not set prices in
the usual supply and demand dynamics. And London and New York are
playing a tag team with any number of markets these days, from forex to LIBOR
to bonds.
Gold could break out in a big way. It would not take all that
much for a large hedge fund, or even a well-heeled world class
individual, to turn about three thousand of those contracts in for
delivery AND take the gold bullion out of the warehouses, moving them to Asia
and pocketing a substantial profit on the gain.
This assault on an unsustainable price peg is how Soros and associates in
Zurich took the Bank of England for over a billion in their selling of the
pound against an unrealistic price point.
Why doesn't anything like this happen?
Is it because people do not have the money to do it? In times
of billion dollar art auctions and $500M homes being built on
spec? Don't make us laugh.
Is it because people do not want gold bullion? The
Shanghai Gold Exchange is routinely moving physical thirty
to forty tonnes per week out of its warehouses. Thirty
tonnes is about 965,000 troy ounces, about three times the total deliverable
at the Comex now in total.
No, it will probably not happen because the big money has been warned off the
Banks' turf, and their game is to keep the wash and rinse price cycles
running to provide a steady profit as long as they can.
As long as price is the 'only component' in the market
dynamics, with demand and supply artificially dampened by a
'no withdrawals' house rules, the liar's pokers carney games based
on very loosely regulated price action can continue.
It is not all that dissimilar to a poker game in which there are unlimited
raises, the rule of table stakes does not apply, and one does not have to
show their cards, and can only be called if the house allows it. Those with
the biggest wallets can keep selling paper gold as long as they wish at
whatever price they wish, and never have to even show their cards, and cannot
effectively be called unless they permit it. I know this example is a
bit rough, but not all that much. It almost looks like a scam,
doesn't it? Well, now you know why I consider those smaller
players who keep coming back to the action in that casino to be a bit
out of touch.
So the bullion banks and their friends can keep cranking out steady profits
while holding bullion prices within a range that is a comfort to
the nervous money printers in the Federal Reserve. This keeps
the government happy, the regulators off their backs so to speak, and the
wash and rinse cycles rolling.
The reason why this sort of imbalance could get sorted out in the
currency markets but not in commodities is illustrated by the relative
experiences of George Soros and the Hunt Brothers.
Lucky for Soros that the forex markets are so broad and deep that
no single group of cronies can control the exchange rules in the 'cash
markets' to suit their plays. Yes some central banks can make it quite
risky, even painful, but the solution is not so neat as what happened in with
the
Hunt Brothers and silver. There the exchange the US regulators just
changed the rules of the game and that was that.
If one were to do something about a price imbalance in a commodities market,
as opposed to an unregulated global market, you would tend to wish to do it off
exchange by slowly accumulating a large portion of the
available global supply, as quietly as possible. This only works
obviously with a commodity that has inherently has a relatively stable supply.
The spoiler in the gold paper game might then be expected
to be those 'outside' the range of the gold pool. They
are those who do not do their business primarily in the betting parlors of
New York and London.
If one cannot secure a sizable portion of supply via paper on the exchange
where the cronies make the rules, one just cuts out the middlemen
and buys it directly, and it works as long as they do it off exchange
and have an unimpeachable line of credit. And then one would
keep stacking their physical metal while enjoying what they think are very
attractive prices.
This is not the first time we have seen such a de facto
pooling arrangement. There was the London Gold Pool,
which sought to 'stabilize the gold price' at $35 dollars from 1961 until the
collapsed in 1968. That mispricing caused a 'run' on the
gold in the US, and led to the Nixon shock in 1971,
the closing of the gold window, and the eventual rise in the price
of gold to $850 in 1980.
Or we could point to the long bear market in gold, which reached its trough
with the sale of England's gold in Brown's
Bottom around $250 between 1999-and 2002, This was resolved with
the so-called Washington
Agreement, which provided a plan for more measured selling and leasing of
Western central bank gold to control the price of bullion largely amongst the
Europeans.
Their intention was to have had this agreement continue until 2009, but
alas, the rising economies of Asia and the BRICS were not sharing their
vision of the future. And so the purchasing of central bank gold
reserves turned positive for the first time in over twenty years around
2006-7, ahead of the collapse of the US housing and credit bubble.
As you may recall, gold subsequently rose to around $1900 in a fairly short
period of time, and has now fallen back to the current price range in dollars
of $1180-1230.
And where are we now?
The BRICS are still buying. There is quite a bit of secrecy and
jawboning surrounding the actual levels of bullion available and unemcumbered
in the Western central banks. The IMF, a ringmaster for the States
if you will, has offered (threatened) to sell the same gold on
about ten occasions.
Not al the Western banks are holding tight. Some are even taking
the unusual steps of repatriating their gold from the Anglo-American vaults
where it has been since the Second World War. They fear that if things
go off the rails, and there is a reckoning of ownership claims, possession
will once again be nine-tenths of the law.
It will be interesting to see where the market forces take us eventually, if
they are allowed to do so. I do not assume necessarily that they
will. .
However the fact remains that the existing 'Bretton Woods II' de facto reserve
currency arrangement for global trade, based on a fiat US dollar, which was
unilaterally put in place by the US in 1971 on the closing of the gold
window, is reaching a point of unsustainability.
I do not believe that there has ever been a purely fiat global currency of
this magnitude before in recorded history. So we should not be too
surprised if the situation seems to evolve rather slowly,
There is already a great deal of posturing by cross national special
interest groups, with 'negotiation' on multiple levels from financial to
diplomatic. We may even expect the abusive use of the
military to push certain proposals forward rather forcefully.
Bureaucrats can become quite draconian when their schemes for
personal power go awry. And in my own monetary thinking a purely fiat
currency for international trade ultimately implies the development, or
imposition, of a global government controlled by the monetary
authority, whatever they may choose to call themselves. The imposition
of fiat valuation relies on control, which means power, and often plenty of
it.
We are in exciting times with history being made it seems. There
are a number of possible outcomes, which quite frankly no one can accurately
forecast at this point. There are too many degress of freedom, so they
literally cannot. But they can throw up theories and strawmen of
what may happen, and charge you to read about it. It is an
honest source of income, rather like writing racing forms or
novellas, or the weather report in the 1950's. And it is fun to talk
about while we watch things develop.
But make no mistake, when some of these fellows overreach, if they really
knew what will happen they would not be telling it to
you. They would be playing with their own money in the casino, for
all they were worth.
And then, alas, there are those who play for pay, who promulgate
their ideas for the special interests, spreading disinformation.
Or just make the most dramatic sort of stuff up, selling a kind of
economic pornography.
This landscape is what I, and several others some more notable
certainly, have called The Currency Wars.