Ref: 09-035A of 1st December, 2009
Are you reading it correctly? Yes, you are. Am I out of my mind? No, I am not.
Gold prices are on upswing. They are going up at the moment slowly due to rising loss of confidence of the Investors in paper currencies and also people at large. Gold is going up not because of hedge against inflation – no one consciously buy this metal with inflation in mind. Have you ever gone to a jeweler’s or gold shop to buy the gold as hedge against inflation? Definitely not.
The analysts and media who have been touting rise in gold as investor’s intention to hedge against inflation must get their head and speech examined. They have been spreading LIE at the instance of the officials of respective governments. With the loss of confidence resulting in steep decline of US dollar, the US administration has been reiterating its oft repeated stance of strong dollar policy; and when the world is not listening to buy the bankrupt dollar, they have been using media and analysts to tell the world NOT to buy gold, adding that gold market is in bubble which is going to burst one day.
Anything will burst one day. Everyone will die one day. Does it mean that we should leave our desire to live and enjoy our life? It is nature’s cycle that what is borne today will die one day; and what is falling or rising one day will rise and fall one day. It is the eternal truth. We do not have to go to the Harvard or Wharton to learn that. This is the parental heritage.
Yes, Gold and Silver have been rising due to investor’s preference to get away from paper assets to something real. They no longer treat Real Estate as really a Real wealth! This is why they are turning to Gold. Gold is GOD, Gold is Truth, and in India there is official state Sanskrit symbol “Satya Mev Jayte” that means “Truth Alone Wins”.
This is the reason that even an illiterate Indian is buying gold all the time. He is not illiterate, today’s Bankers, Investment Bankers, Insurers, Central Bankers, Finance Ministers, Governors are. How do you measure the actions of all Central Bankers, including that of George Brown, the Prime Minister of UK who was the Chancellor of HM Treasury, sold Gold at the bottom of the cycle – $ 260 to $320? Almost all Central Banks sold over 3000 tons of gold at the rock bottom prices during last 15 years.
Is there any demand –supply imbalance that pushes up the gold? No. The demand-supply rule operates in normal times, not in emergency or 911 call. And why should Gold go to US$ 6400 and Silver to $ 80 as projected by this Author? Why?
What the World Doesn’t Know
..Is the hidden the fact that “United States has lost almost all of its Gold during its covert practice for over 20 years”. YES, the gold may be there physically at Fort Knox or HSBC Bullion Vault in USA. But that is NOT enough. Who owns the gold is more important than who keeps the gold. It is like your goods are in a warehouse or bank locker. The warehouse-keeper or banker can not claim Title to or Ownership of those goods. These goods are kept with him in Trust.
The FED and Treasury appear to have been concealing lending of gold to hedge funds by camouflaging transactions through various central banks. When those Central Banks lend to these hedge funds to short the gold, they appear to claim the gold from Fed and Treasury who earmark the gold in its balance sheets. In other words, the earmarked gold shown in Fed / Treasury balance sheets is in fact owned by foreign Central Bankers and is no longer owned by the United States. If the shorted gold does not return to Fed/Treasury, they will be obliged to show it as “sale” one day. That day of reckoning will come when the Foreign Central Banks start demanding the gold physically.
According to my own research almost 6100 tons of gold earmarked in the Fed/Treasury balance sheets are non-returnable. The hedge funds who shorted it at prices $260 to $360 can not buy back at today’s prices. If they can not return, their deposits will be at the most forfeited. In other words, the Fed/Treasury will be forced to recognize the forced sale of gold @ $260 to $360 or more, but not more than $430 at the most. That is, Americans have lost their most valuable and prized asset – Gold – due to fraud perpetrated by the Fed/Treasury officials. It happened without their knowledge because the Fed/Treasury balance sheets were never audited. The office of OCC (Office of Controller of Currency) conducts only physical verification of the gold, not the true ownership. This is why Ron Paul, Senator, introduced a bill to audit the books of Fed. That is not enough. The gold is handled mainly by US treasury – Fed merely manages the operational part.
You must read my book “Sub Prime Resolved” Chapter 14 titled “Where is MacKenna’s Gold” which deals with this issue comprehensively in 30 pages and proves beyond doubt that “United States has lost almost 78% of its gold through covert lending practices to certain banks, investment banks and hedge funds to depress the gold prices with intent to control the inflation numbers to help them justify lower interest rates”. The book uses same official figures churned out by the Fed/Treasury.
There is further possibility of more selling after the writing of this book. Total loss could be 90%
It is a Great EXPOSE since the Watergate Scandal.
The book goes to the bottom of the statistics and its couched language (with double meaning) to conceal the truth. Most of the gold must be belonging to European countries, Switzerland, IMF, World Bank and some other major gold owners such as Australia and Canada, who live in the dream world that their gold is safe in the vaults of the Fed.
When the Truth will come out?
If there is a massive call from the States and Local Governments like California to launch a campaign against the Fed/Treasury to give them enough funds by selling part of existing gold reserve of 8134 tons, will meet with the denials from US Administration (Fed /Treasury) on evasive grounds.
Both Fed/Treasury know pretty well that there is no real gold ownership left with them, and that selling of gold belonging to other nations would tantamount to committing breach of trust. Even the President of United States, be it were President Clinton, George Bush or Barack Obama, may not be aware of the constructive loss of US Gold through the hedgers who acted solely at the behest of same Fed/Treasury officials having ulterior motive.
The gold borrowers are obviously who is who in the field of banking, investment banking and hedge funds. If they are sought to be prosecuted, with the threat of perjury, they will come out in the open with the truth. Some may even commit suicides rather than facing self – incriminatory charges and face imprisonment for life.
When the market realizes that the US no longer has as much gold as claimed, in fact having lost almost 77% as above, hell will break lose in the media, town hall meetings, White House, IMF Head Quarters, World Bank, European Union, Great Britain, China, India and Switzerland. Many of them are the real owners of the gold who presumed that it is lying in safe place in United States. They will realize first time that “United States is no longer safe place to keep gold” owned by them. What they own is the piece of paper from United States promising them to deliver the gold on demand.
This is why I always mention in many articles and reply to readers that “Physical is Physical, and Paper is Paper” Asset. One would be downright stupid if he entrusts tons of gold to some one other than him. It is like entrusting one’s wife in the care of another man. Gold is the kind of assets that must be held by the owner physically.
Turning to recent rise in gold prices, please look at the Open Interest for December 2009 and February 2010. The shorter have been rolling over the contract every two months in the hope that the prices may drop so that they can cover their short position. However, the gold has been rising for over 5 years, denying them comfort so badly required by them. Look at the following “Open Interest” positions (our comments follow thereafter):
At the time of writing, the Open Interest position relating to gold for two key months – December 2009 and February 2010 were as under:
2009.12.01 GOLD Dec 2009 (NYMEX:GC.Z09) OI 12,041 contracts (= 1.204 Million Troy Ounces)
Or 37.45 tons valued at US$ 1.442 Billions
2009.12.01 GOLD Feb 2010 (NYMEX:GC.G10.E) OI 364,298 contracts (= 36.429 Millions Troy Ounces)
Or massive 1,133 tons of Gold- 50% of world annual production deliverable in One month
Now, look at the following chart of 27th November, 2009 when the gold dropped over 4.5% in matter of minutes:
In matter of minutes, massive volume of over 111,000 contracts equivalent to 11,100,000 Troy Ounces or 345 tons were recorded.
Some operators manipulated to crash gold prices in matter of minutes so that they could buy back or cover the short position for Dec 2009 period.
The contracts were rolled over into Feb 2010 contracts where the Open Interest swelled to 364,298 contracts or 36.249 millions of troy ounces or massive 1,133 tons of gold. It represents 50% of world annual gold output to be delivered in one month only.
It is possible, the shorter may try to roll over the Feb 2010 contracts into longer dated months, provided the music does not stop here. If roll over facility is stopped, the short sellers would be obliged to default or doom to their failure.
- Just imagine. The gold prices have risen to US$ 1195 due to normal investment demand. If those buyers or large investment funds/hedge funds get the wind that there is no real gold with US, a massive rally may ensue due to heavy rush to buy back the contracts under Open Interest. The gold could propel into uncharted territory. It is just wild guess where the gold could possibly go to $1800, 2400, 3200 or 6400?
- The gold could go to$ 2400 due to normal Investment demand. The gold reached the height of $ 850 in 1980s. If you use today’s inflation adjusted dollar, the price could go to $2400 presuming other factors remain constant.
- The US$ index now at about 74 could drop to psychological 71 level (intermediate) or 4%. It could drop further to 65 and finally solid support at 61. This means that the dollar could drop by 4% in very short term to 20% in 9 months. In other words, the rise in gold prices due to weaker dollar could rise by another $480 (20% of $2400)
- The recent financial crisis has thrown Central Banks (Fed, HM Treasury UK, European Central Bank, China, India, Australia, some smaller Asian nations, to print over $ 6.6 trillions of dollars equivalent. Considering the global Gold Stock of about 80,000 tons in the hands of Central Banks and Private individuals (like Indian/Chinese citizens). If you divide $ 6.6 trillions/80,000 tons of gold, the Equivalent price of excess money will be $ 2,566/ounce.
- Thus, the notional price of gold should be $2400 + $ 480 + $ 2566 = $5,446 ounce
- ADD to it if the short sellers have to rush to the market to cover their shorts which could be any number $ 1000 to $ 8000. I am counting only $ 1000 as short covering effect, which would raise the price of gold to $ 6446 or say $6400 as the caption shows.
- In reality, the price could rise much higher because the $ will weaken much further, by another 40% ($ index to 40 or about). It will potentially add another $ 2000 per ounce.
- The price in non-dollar countries may not rise to that extent, because the effects will be muted to the extent of local currency appreciation.
- Gold and silver has outperformed every other Asset class in last 5 years. See the following table.
Historically ratio of gold to silver in 80s was just 16 to 20 (When the gold reached $ 800 the silver peaked at $ 50 giving Gold/Silver ratio of only 16. In that case, why our projections give Gold a target of 6400 and only $ 80 to Silver? It should have been $400. But not so, because Silver is no substitute of gold anywhere. It is available plenty and also, an industrial metal. Every copper producer has a bye-product of Silver. Gold is never a significant bye-product of any mining operation. Further, the industrial demand of Silver may gain if new cell battery known as “Ag-Zn” (Silver Zinc battery) replaces the Ni-Cd or Lithium battery. The new Ag-Zn battery is reported to be super conductor of electricity and heat, far superior to any other battery in the market place. It also implies that Ni and Cadmium prices will turn softer due to lesser industrial demand.
- I have a Gold Target of $ 1500 (by March, 2010), $ 1800 (June, 2010), $ 2100 (Sep 2010), $2400 (Mar 2011), $2800 (Dec 2011) and $3200 (June 2012) in normal circumstances due to investor’s demand and weakness in currency WITHOUT taking into account the short covering related rise or additional Central Bank purchase (such as India)
- The target could be higher by 50% and time shorter by 25%. If the short covering takes place, Add 50% to the above target price.
- Dollar weakness will add more. The dollar has more credential to go lower.
- However, if the Obama Administration adopts the measures suggested in my book, the fall of dollar would be arrested or reversed.
- However, the gold prices of other countries will rise due to weakening of local currency. In U$ terms they would be corrected.
- If dollar is demonetized or reverse split (cancelling current dollars and replacing them 5 to 1), then the price of Gold will decline to reflect the reconstituted currency.
- In less than 30 months, if the present liberal monetary policy is pursued, and short covering does take place, the gold price could rise to $ 6400 in 30 months. Some major banks in the world could be busted. (2 from USA, 2 from UK, One from Europe) and One from Switzerland)
- Once the gold therefore rises to $ 3200 or about, the investors may adopt the trading strategy. Until then, they can afford to buy and hold for a period between 12 months to 18 months.
- There could be predominant selling from India, including Central Bank to book profit. Many may be tempted to sell gold and buy home which is the average dream of any young person. You have to allow reduction of prices on account of this factor.
- The current prices of $1200 are therefore screaming bargain. They are still at 50% discount to inflation adjusted dollars.
- The investor must read my book “Sub Prime Resolved” that cost only $ 59.95. It is advisable to spend $ 60 before committing large resources for investment into Gold or Silver.
- If he disagrees wit the finding on Gold chapter, he may not adhere to above targets, but may scale down by 30% to 50%.
- He may ignore the effect of short covering.
- The investor may use the following table as guide. The figures input are dummy. See Excel spreadsheet for Download. The investors may use it to input their own variables.
Anil Selarka, Author (Kalidas)
Hong Kong, Ref: 09-035A of 2009.12.02
Please note that this is the considered opinion of the author. The author is not liable or responsible for any loss or damage the investor may suffer if the situation does not develop as intended or forecast. This article is meant for only experienced investor or professionals who understand the vagaries of trade.