John Hathaway's latest market letter for Tocqueville Asset Management may get as close to a complaint of gold price suppression as anyone can while retaining some respectability in the financial industry. Hathaway writes that there have been efforts to drive down not only gold but also the cryptocurrency bitcoin because of the competition they pose to government currencies.
Hathaway writes:
"Unlike physical, gold is abundant in the synthetic world because physical bars are replicated almost infinitely due to the magic of a system known as hypothecation and rehypothecation. Bets on the gold price are expressed via futures contracts on Comex and over the counter between financial institutions with big balance sheets. The bets are settled in cash, and almost never involve physical metal. In Western capital markets, synthetic gold is actively traded.
"In Asia, only physical gold is accepted. The burgeoning Shanghai Gold Exchange requires 100-percent backing of futures contracts by physical metal. We believe that the pricing power and credibility of Comex and the surrounding bullion banking system will erode due to the migration of physical gold to India, China, and other Asian nations. In addition, the emergence of platforms such as the recently launched Allocated Bullion Exchange in Australia, which requires full backing of physical gold, will in our opinion chip away at synthetic gold trading. We believe that relocation of active gold trading on platforms that require full gold backing will lead to improved price discovery and higher gold prices....
"Virtually no physical gold changed hands during headline-making shakeouts in the gold price during 2017. In our view the shakeouts were a component of trading algorithms thought up by macro-traders as the core component of the worldview that a resurgent U.S. economy would be wrought by the pro-business policies of the Trump administration. A strong U.S. dollar would be the inevitable offshoot of a resurgent U.S. economy.
"The appendix" to the market letter "contains several examples of synthetic raids that relied upon naked short-selling (selling something not in the possession of the seller). In our view the appendix clearly shows deliberate efforts to drive the gold price down. ...
"Despite multiple orchestrated post-Trump election 'bear raids,' the gold price achieved a strong increase in the past year and managed to survive the application of the Trump myth to all asset classes. ..."
Of cryptocurrencies, Hathaway writes:
"Distrust of money printing by world governments is a key part of the rationale for bitcoin and other cryptocurrencies. In this sense cryptocurrencies attempt to mimic one of the key attributes of gold: a liquid real asset with no counterparty risk. We share the millennial distrust of fiat paper, welcome digital currencies, and understand why governments view them with great concern. We view cryptocurrencies as contributors, and possibly as accelerants, to the long-term undermining of all paper currencies. We see them as allies of gold and threats to fiat currency, not as an existential threat to the metal, as they have been so frequently portrayed.
"Bitcoin, in our view, manifests the rejection by private citizens of centralized government authority. Governments without exception have sounded the alarm. Andrew Bailey, head of the UK Financial Conduct Authority, told the BBC that neither central banks nor the government stood behind the 'currency' and therefore it was not a secure investment. As noted by 13D Research on December 7, 2017, 'The worst nightmare for central banks is a rising price of gold because it means they are behind the curve, bond yields will rise, and people are losing confidence in paper money.' That nightmare only worsens as acceptance of cryptocurrencies rises.
"Now that the Chicago Mercantile Exchange, through which all futures contracts enjoy full U.S. government credit backing, has opened trading in bitcoin futures contracts, the sledding for cryptocurrency prices could become difficult. The recent 40-percent price break in bitcoin and other cryptocurrencies coincided with the launch of futures trading that began in mid-December 2017. The opening of futures trading on the CME created an organized platform on which to mobilize a synthetic supply of the cryptocurrency.
"Previously, bitcoin was a one-way market, with few natural sellers and only 3,600 new Bitcoins mined per day, or 1.3 million per year on a base of 16.5 million in circulation (according to the BBC on December 17, 2017) vs. a theoretical limit of 21 million for total supply.
"Through the sorcery of large financial institution balance sheets (without any bitcoin inventory), a synthetic supply materialized overnight on the Merc. Enter the CME and there was suddenly a two-way market in which large financial interests could profit from volatility, break the cockiness of the most strident advocates, and perhaps even dampen the price surge. ..."
Hathaway concludes:
"In our opinion when the make-believe world of synthetic gold, algorithmic trading, exchange-traded funds, fake interest rates, and passive investment collides with the realities of an uncontrollably rising budget deficit and mismatches between surrogates and underlying assets, gold (the real asset) will benefit.
"To us, it is obvious that the U.S. and other Western governments are simply printing money to service their own debt. When is the tipping point of public recognition of these facts? Perhaps as soon as 2018 or 2019. The catalysts will be higher inflation and interest rates and lower financial-market valuations.
"There is no way to predict the moment, but it seems to us that an eventual loss of confidence in paper currencies, including the U.S. dollar, is inescapable, and most likely coming sooner rather than later. It is not, in our opinion, too soon to embrace exposure to gold."
Hathaway's market letter is posted at Tocqueville's internet site here:
http://tocqueville.com/tocqueville-gold-strat...ter-2017-inv...
