On
Wednesday August 17th the CME came out with an announcement
that they would be raising margin rates on the purchase of future contracts
on gold. They reported that this was an effort on their part to cool off the
price of gold which has enjoyed a parabolic run since August 1st.
They said that there would be more rate hikes to protect gold from becoming a
bubble. When I read this I laughed at the arrogance of the CME. There is only
one reason that that they want to stop gold’s parabolic run. They
simply do not have enough gold to fulfill the future contracts that they have
already sold. Let’s not forget that one future contract is sold in lots
of 5,000 ounces. That means if we use a proxy price if $2,000 an ounce, to
make the math simple, we are talking about $10 million for one contract. Add
to that, the CME gets a fee of $50.00 an ounce above the spot price, so for
every contract sold they earn $250,000.00. Delivery and shipping are the
buyers concern. This would lead me to conclude that the only possible reason
to slow down gold’s parabolic run would be that they simply do not have
the gold to satisfy the contracts sold.
Let us
also not forget that last April the CME raised the margin rate on silver not
once but five times to get silver to finally capitulate. The fact is that the
CME does not have the physical gold to satisfy the future contracts that have
already been sold. Do you really think this will play out differently than it
did with silver last April? Some may call it a bubble but I do not agree.
Call it whatever you want. The fact remains that there is simply not enough
gold to satisfy the thirst for the prospective buyers.
George
Soros, the hedge fund investor who called gold the ultimate bubble, has
divested his portfolio of nearly its entire investment in the gold, inciting
many to fear that the price will very soon plummet, devaluing the
specie-heavy portfolios of millions of investors.
Agree with
him or not, like it or not, like him or not, attention must be paid to his
movements. It can be very expensive to ignore the predictions of Soros. For
example, on September 16, 1992 (a date subsequently known as “Black
Wednesday”), one of the investment funds of Soros sold short more than
$10 billion worth of pounds sterling, profiting from the British government's
reluctance to adjust its interest rates to levels comparable to those of
other European Exchange Rate Mechanism countries. Defiantly, the UK withdrew
from the European Exchange Rate Mechanism, triggering an unsettling
devaluation of the pound. Not everyone was harmed by this plummet, however.
George Soros earned over $1 billion in the ordeal. Consequently, he was
described by the media as the man who broke the Bank of England. In 1997, the
UK Treasury estimated the cost of Black Wednesday at 3.4 billion pounds. This
latest move to take a position against gold may have similar repercussions
around the globe.
Soros,
the Hungarian-born financier made the move to cut his holdings of gold only
in the first quarter of 2011. As with most things this King Midas touches,
the price per ounce of gold had skyrocketed during the period of his
investment in it. While at the beginning of last year gold was trading at
$1,100 an ounce, the trading price in 2011 has risen to as much $1,800.
The
exact date of the dramatic divestment by Soros is unknown. It is known that
the majority of those holdings are managed through the Soros Fund Management
Company. Filings to the Securities and Exchange Commission (SEC), the
American regulator showed that he had sold 99% of his holding in the SPDR
Gold Trust (GLD), an exchange-traded fund (ETF) backed by gold bullion, by
the end of March. The New York-based fund sold its entire holding in GLD but
Mr. Soros bought shares in two mining companies, Freeport-McMoRan Copper
& Gold and Goldcorp.
Despite
the potential for a devastating global impact of such a move by one so
influential, there are those on Wall Street praising the insight of Soros.
Historically, it is typical that as the precious metals rally ends, you will
get transition toward related equities. Indeed, the gold mining stocks have
lagged the underlying asset as people would rather hold gold and silver above
the ground rather than these metals still in the ground.
As I
write today it looks like Mr. Soros did not get this one right and there are
those not entirely convinced of the wisdom of Mr. Soros.
Filings to the SEC showed that Paulson &
Co, the US hedge fund run by John Paulson, left its holding in the SPDR Gold
Trust (GLD) unchanged. It was reported in Bloomberg online that Hal Lehr, a
commodity trader at Deutsche Bank, said he remains bullish on gold despite
its current levels and believed it could reach $2,000 an ounce by
year’s end. The report went on to say that gold ETF holdings fell by
3.3 percent in the first quarter of 2011 and there are reliable indications
that some of that investment was used to purchase physical gold bullion.
As if
there is not enough uncertainty, a worldwide devaluation of gold could create
a ripple of financial insecurity. There can be no doubt that gold is viewed
by a majority of the world as a very safe and trustworthy investment, one
that only increases in value. This sort of reasoned speculation has
undoubtedly fueled the bullish ballooning of the price per ounce of the
metal.
If the
actions of Mr. Soros and other global power brokers have the effect of
devaluing gold, then the legitimacy and appeal of the call of many to return
to a gold standard for the value of paper currency or to abolish the Federal
Reserve and other similar central banks around the world will be similarly
devalued.
Once the
worth of both gold and paper currency is wiped out by the conspiring plotting
of financiers, globalists, multinational corporations, central bank boards,
and other likeminded and equally influential monied interests, there will be
nowhere to turn for an object of value. This complete obliteration of
precious metals and paper currencies will leave those who create such
catastrophes as the sole site of economic refuge for those cast headlong into
the storm of boom and bust cycles and the devastation that comes in their
wake.
One of
the most toxic elements present in this pool of bitter water is a worthless
money supply. The Federal Reserve creates this non-potable problem by
engaging in a practice known euphemistically as quantitative easing. It is a
policy that plain-speaking men would call printing worthless money.
There is
no governor on the engine of the Federal Reserve's printing press and the
speed with which it can crank out reams of worthless paper money is dizzying.
However, unlike paper money, gold cannot be manufactured and it is of finite
quantity. While this bodes well for the eventual rebound of the price of gold
(assuming that it soon begins to descend), there can be little expectation
that those who benefit most from a world marketplace dependent on dollars and
pounds will allow gold to supplant these currencies as the coin of the realm.
From their point of view, access to that resource must be restricted and
dependence on printed money must be perpetuated.
The
current debt crisis in Europe is an example of how the price of gold can
benefit from currency’s shortfall. The millions upon millions of
dollars owed by Greece, Ireland, Portugal, and others in the eurozone
devalues paper currency while artificially (perhaps) propelling the price of
gold into the stratosphere.
That
said, there is a good chance that any effort to sell off holdings in the
precious metal by George Soros and others may convince others to dump their
own investments in gold rather than run the risk of being found on the
outside of the trade looking in.
In fact
I’m sure this is exactly what that cagey cat George Soros is betting
on.
I will
remain long GLD, SGOL, PHYS, SLV, PSLV and AGQ.
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