GOLD PRIMER 1: RELATIONSHIP BETWEEN GOLD & THE USD

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The Bernank Says To Ron Paul That Gold Is Not Money

by TRACE MAYER, J.D. on JULY 13, 2011 · 0 COMMENTS


This has to be one of the most ironic and ignorant statement I have heard come out of Washington. The tail risk is with people like Bernanke running the Federal Reserve, Trichet running the ECB, the eurocrats trying to run the rating agencies and politicians trying to design everyone else’s lifestyle.



It appears that despite a fairly short consolidation that the next gold upleg has started. The gold 50dma is $1,522.03 and the 200dma is $1,423.69. The silver 50dma is $36.06 and the 200dma is $32.24.

During this upleg that will likely last until November before a correction or consolidation may see gold run to $1,800 and silver to the $55-60 range. It will be important to see the activity over the next week or so to determine whether the strength will stay. If the monetary metals pull back slightly and continue their usual summer consolidation then it will help the 200dma continue to rise which will lay a stronger base for the autumn and winter rally

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Mar 15, 2013

Former US Treasury Official - Fed Desperate To Avoid Collapse


Today a former Assistant Secretary of the US Treasury told King World News, “... the dollar is the vulnerable spot in the Fed’s policy management, and the popping of the bubble is likely to come from the dollar.” Former Assistant of the US Treasury, Dr. Paul Craig Roberts, also warned King World News that a financial collapse is coming, and the Fed is desperately manipulating the gold price in an attempt to avoid the collapse.

Here is what Dr. Roberts had to say in this extraordinary and exclusive interview: “A lot of people just can’t imagine that the government would fix the gold price. And yet, in full view, the government fixes the bond price, and the banks fix the LIBOR rate. So why is it people can’t comprehend that the government would fix the price of gold (laughter ensues)?”

“And you have to ask yourself, who would short gold in a rising gold market? In the physical gold market the demand for gold rises consistently. Investors would ride the rise in gold. Do investors go in and short a bull market in stocks? Not unless they want to get wiped out. So why would they short a rising gold market unless the purpose is to stop the rise?



So it’s obvious that they are fixing the price of gold because we hear every day that there is more physical demand for people who actually want the metal....


“We hear reports that central banks are starting to acquire and accumulate gold using their dollars, and lightening their dollar load.



So if the demand for physical possession is strong, why would you short gold in the paper market, unless you are trying to hold down the rise of its price? When the price of gold hit $1,900 a year or two ago it told the Fed that they can’t fix the price of bonds if the world perceives the dollar deteriorating at such a rapid rate in terms of the price of precious metals.



If the dollar is deteriorating there (against gold), people also know that the value of assets denominated in dollars are also deteriorating. So the Fed was worried that they would lose control of the bond price and interest rates because of the erosion in the dollar price of gold. That is the origin of this policy. The (heavy) shorting appeared then, and they broke up what was a very consistent and strong rise for over a decade.



If you look at the chart you see there is a very sharp increase, and then it drops down a little bit and is kind of capped. So it’s an obvious manipulation.”



Eric King: “Dr. Roberts, as the former Assistant Secretary of the US Treasury, you brought up the dollar there, as you watch the massive creation of money, what are your thoughts on that?”



Dr. Roberts: “You can’t retain a stable exchange value of your currency while you print it in enormous quantities. So, at some point it has to shake the confidence of the rest of the world in the dollar as the reserve currency.



We already know about efforts to move away from the use of the dollar as the reserve currency. We know the BRIC’s are making agreements to resolve their trade balances with one another in their own currencies. That’s Russia, China, Brazil, South Africa, India. It covers most of the geography of the world.



There are reports that Japan and China, despite their disputes over islands, are working to conduct their trade in their own currencies. As the use of the dollar as the reserve currency for transactions or as a store of value declines, then the demand for dollars declines, so its exchange value in currency markets declines.



The Federal Reserve can print all of the money it needs in order to support bond prices, but printing dollars doesn’t support the dollar price. And the Fed has not the power to print foreign currencies with which to support the dollar price. So the dollar is the vulnerable spot in the Fed’s policy management, and the popping of the bubble is likely to come from the dollar.”



Here is the link to Part II of the extraordinary Dr. Paul Craig Roberts written interview.


This is the first in a series of interviews with former Assistant Secretary of the US Treasury Roberts that will be released which reveals the increasingly desperate situation that Western central planners face going forward. The written portion above is just a small part of this extraordinary interview with Dr. Roberts.



Dr. Roberts discusses the Fed’s manipulation in the gold market, and a coming financial collapse. In addition to the written interviews which will be released, the KWN audio interview with Dr. Roberts is available now and you can listen to it byCLICKING HERE.



IMPORTANT: Jim Sinclair is holding a meeting in New York this coming Wednesday, March 20th at 2 PM EST. For details and to sign up to attend this event CLICK HERE.



The interviews with Dr. Paul Craig Roberts, Egon von Greyerz, Rob Arnott, James Turk, Jim Sinclair, John Embry, Gerald Celente, Rick Rule, Ben Davies and Andrew Maguire are available now. Also, be sure to listen to the other recent KWN interviews which included Marc Faber, Felix Zulauf and Art Cashin byCLICKING HERE.



© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. However, linking directly to the blog page is permitted and encouraged.



Eric King

KingWorldNews.com

To return to BLOG click here.

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WEDNESDAY, JUNE 12, 2013
Copernicus, Galileo and Gold


By Hugo Salinas Price

4

Hugo Salinas Price

We are deceived when we consent to think about the "price of gold." At the very outset of our thoughts regarding gold, we are wrong, just as astronomers prior to Copernicus were wrong in thinking about the solar system as geo-centric, with the Sun, Moon and planets describing perfect circles around Earth. Gold is − to follow the astronomical simile − the center of the monetary universe, and the planets − the currencies − circle the Sun, which represents gold.


The correct starting point is the price of a currency expressed in terms of gold, and not the other way around.


When the price of the dollar was fixed at $20.67 per ounce of gold, up to the time of FDR, the price of the dollar was $1/20.67 = .0483782 oz. of gold, or 4.84 hundredths of an ounce of gold.


When FDR "raised the price of gold" he actually lowered the price of the dollar: $1/35 = .028574 oz. of gold, or 2.86 hundredths of an ounce.


Thus, FDR lowered the price of the dollar from 4.84 hundredths, to 2.86 hundredths of an ounce.


This was done in the Depression of the '30s, when FDR was anxious to get the unemployed back to work. The purpose of devaluing the dollar by lowering its price in gold was to cheapen labor costs (without telling Labor what he was doing!) and put more people to work by getting them to accept working for lower wages, without their understanding what was going on. Cheaper labor meant cheaper American products and more exports.


At 2.86 hundredths of an ounce, the price of the dollar was below market value, and gold became overvalued in terms of dollars.
It is a principle of economics that undervalued money is exported from the country where it circulates, and overvalued money flows into the country where it is overvalued.


In 1934, with the dollar at 2.86 hundredths of an ounce of gold, gold was overvalued on the world market, and for that reason enormous quantities of gold began to flow into the US from all corners of the world. At the outbreak of WWII, the gold stock of the USA was gigantic as a result of inflows of foreign-owned gold.


At a "price of gold" of $1388/oz, more or less where we are today, the price of the dollar is $1/1388 = .00072 oz. of gold.


Gold is leaving the USA and the West, which is dollar-centric, because at .00072 (7.2 ten-thousandths) of an ounce the price of the dollar is overvalued, and gold is undervalued. There will come a moment when the managers who control the price of the dollar in gold will find that they have run out of gold to sell, and are powerless to support the price of the dollar. That moment is approaching; before the dollar controllers run out of gold to sell, the world will devalue the dollar and there will be nothing that the US will able to do about it.


This is already happening in the countries of the East − the Middle East, India, Pakistan, China and Southeast Asia, where gold trades at premiums to the undervalued "price of gold" which the Anglo-American Axis insists on maintaining.


The premiums effectively devalue the dollar just enough to ensure that the gold travels from West to East. Russia, the remaining Western power not subject to the Anglo-American Axis, is also sweeping up gold. The Axis is auctioning off its gold to the highest bidders, and the highest bidders are taking it off the market.


When the Anglo-American Axis can no longer rig the gold auction and support the price of the dollar by selling gold, because they have none left to sell, then the rest of the world will bid for gold, not only against the US dollar but against all other currencies. The prices of currencies will fall like stones, tending to a new world equilibrium, where the flows of gold seek to eliminate both under-valuations and over-valuations wherever they present themselves.


If no one nation or block of nations can manage to establish its currency as the world reserve currency and thus supplant the dollar, then, since no one currency will be supreme, supremacy will devolve to the legitimate monarch once again: gold will be the international monetary language of business once again, as it has always been. Thus, the price of gold will become extinct, as Professor Antal E. Fekete has predicted. All prices will be gold prices, or silver prices at various ratios around the world.


The pertinacity of the Anglo-American Axis in auctioning off all its gold, down to the last available ounce, shows the world that the Axis is betting everything it represents on the ability of the dollar to dethrone gold: this is the Church excommunicating Galileo and insisting on the central position of Earth in the Solar System. A very big mistake!


Gold cannot possibly lose its central position as the pre-eminent money used by the world for thousands of years. The aggressive measures of the Anglo-American Axis with regard to gold are absurd and they will lead to total disaster both for the Axis, and for the world which has been forced to follow its lead for over 40 years.


In the worst case, as the rest of the world devalues the dollar by purchasing all the gold available in the West, the partisans of the dollar may find themselves corralled into a devastating total war as a last desperate measure to support their outlandish pretention to supplant gold with a man-made fiat currency, the dollar. Once again, nemesis will follow hubris, with mankind as the tragic figure.


In my view, the wise (always a small minority in all ages) will squirrel away some ounces against the day of the ignominious collapse of the Anglo-American Axis' attempt to reorder the world's monetary system around a paper and digital currency.


Hugo Salinas Price is a successful, retired businessman who lives in Mexico. A follower of the Austrian School of Economics since his youth, he has written three books on how and why silver should be instituted as money in Mexico, in parallel with paper money, and numerous related articles in English and Spanish, posted at his website. His organization, the Mexican Civic Association Pro Silver, has lobbied the Mexican Congress to approve legislation to institute the pure silver "Libertad" ounce as money.

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Frank Holmes

An Illustrated Timeline of the Gold Standard in the U.S.

Ever since the U.S. left the gold standard for good in 1971, some politicians and investors have called for its return. At one of the Republican presidential debates in October, Texas Senator Ted Cruz became the latest, touting the stability and booming prosperity the U.S. economy enjoyed in the years when the dollar was pegged to the yellow metal.

In previous Frank Talks, I've highlighted some of the consequences of having a free-floating fiat currency, one of them being soaring national debt. When money is limited, as it is in a true gold standard system, so too is reckless government spending.
You can see how dramatically all debt in the U.S., both public and private, began to soar past economic growth once the gold standard was ended.

But my goal today isn't to argue for or against a gold standard. The system worked well in the second half of the 19th century, but economies have grown so large that there's no longer any way they could be sustained by such a limited commodity.

Even former Federal Reserve Chairman Alan Greenspan, who has consistently supported the idea that gold is money, agrees, telling the Gold Report in 2013: "A return to the gold standard in any form is nowhere on anybody's horizon."
So instead, I want to lay out the facts of America's past relationship with gold as a currency and dispel some of the misconceptions people might have.

1789
For the first 40 years of its existence, the U.S. operates on a bimetallic system of gold and silver-officially, at least. Practically, silver coins are the favored currency, and domestic purchases made with gold are rare.

1834
Congress adjusts the silver-to-gold ratio, from 15-1 to 16-1. This makes gold cheaper relative to the world market price ratio. Silver begins to be exported, and by 1850, silver coins all but disappear in the U.S. The yellow metal becomes the principal form of currency.
1862

The U.S. abandons the gold standard briefly during the Civil War. For the first time, it issues fiat money with no convertibility into silver, gold or any other metal. In 1879, Congress freezes the amount of paper money in circulation at $347 million, where it remains for about a century.

1879
The U.S. finally adopts a "classic" gold standard, one that proponents such as Senator Cruz wish to revive. In such a system, a standard mass of the yellow metal defines the value of a currency unit. Paper money, then, is not a separate good from gold and is fully convertible.

This system lasts until World War I. Although this period isn't free of financial crises, it's still widely considered to be one of the most economically stable in American history.

But let's not overstate this stability. The table below shows us that between 1879 and 1913, when the classic gold standard is in effect, the U.S. actually experiences an average deflationary rate of -0.02 percent. At the same time, consumer prices have a standard deviation of only 1.98. Inflation never falls below -4.74 percent or rises above 4.53 percent. The other periods, by contrast, have huge swings in consumer prices.

1900
Concerned that the U.S. might be returning to a bimetallic system, Congress passes the Gold Standard Act, making the gold dollar the official unit of currency. Greenbacks remain as legal tender but for the first time can be redeemed in gold.

1913
In response to periodic banking panics when gold reserves fell short, the Federal Reserve is established as a lender of last resort. The Fed is not only charged with maintaining the gold standard but also starts issuing Federal Reserve notes that are 40 percent backed by the yellow metal.

1933

Four years after the Wall Street Crash of 1929, the Fed removes the U.S. from the gold standard to expand monetary policy. Convertibility, therefore, is ended.
"The free circulation of gold coins is unnecessary," President Franklin Roosevelt tells Congress, insisting that the transfer of gold "is essential only for the payment of international trade balances."

Roosevelt nationalizes gold by issuing an executive order requiring all gold coins, bullion and certificates to be turned over to the Fed at $20.67 per ounce. Hoarding gold in coin or bullion is punishable by a fine of up to $10,000 and/or jail time. These policies are reinforced in the Gold Reserve Act of 1934.

1944

Representatives from the U.S. and 43 other countries meet in Bretton Woods, New Hampshire, to normalize commercial and financial relations. The agreement is a quasi-gold standard whereby each currency other than the U.S. dollar has a fixed parity to the dollar, which itself is pegged to and can be exchanged for gold at $35 per ounce. (This does not apply to Americans, however, who still can't hold gold.) The dollar becomes the world's reserve currency.

1971
President Richard Nixon "closes the gold window" after announcing the U.S. would no longer convert dollars into gold. This move is initially supposed to be temporary, but in 1976 the U.S. monetary system officially becomes one purely of fiat money. Gold rises 2,330 percent during the decade, from $35 per ounce to $850.

1974
On December 31, President Gerald Ford permits private gold ownership again in the U.S.
For more on the gold standard, I want to direct you to a chapter in my book The Goldwatcher: Demystifying Gold Investing, written by its coauthor, John Katz. In the chapter, titled "The Rise and Fall

of the Gold Standard," John asks whether the gold standard was to blame for the Crash of 1929 and, subsequently, the Great Depression. No matter your opinion on the topic, it's a fascinating read,

Take our poll, then be sure to subscribe to our weekly, award-winning newsletter for more news and insight on gold.

U.S. Global Investors, Inc. is an investment adviser registered with the Securities and Exchange Commission ("SEC"). This does not mean that we are sponsored, recommended, or approved by the SEC, or that our abilities or qualifications in any respect have been passed upon by the SEC or any officer of the SEC.

This commentary should not be considered a solicitation or offering of any investment product.

Certain materials in this commentary may contain dated information. The information provided was current at the time of publication.

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Frank Holmes

CEO and Chief Investment Officer
U.S. Global Investors

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Historical recap based on latest development:

LeMetropole Café

The Case for Gold history in point form

Daan Joubert
There are readers here who might be too young to be aware of the history of gold and what that means for the future of the price of gold, and of course, of silver. The story of gold is however much more convoluted than that of silver. The latter has the effort of the Hunt brothers to corner the silver market as its main point of interest and not too much else, even though silver could have become the primary focus of the current price suppression of the precious metals. This is all about gold, the monetary metal.

In February 1996 the price of gold broke a major chart pattern in the wrong direction: after the break higher and also above $400/oz, it reversed direction and started off on a bear market. In terms of fundamentals at that time, it was the wrong direction and therefore not anticipated. This paradox triggered an extended study of the operation of the gold market that soon brought realization that the market was being influenced by external forces, probably to support the US dollar. I have been a long-term bull for gold ever since then.

Rather than an extended write up of the history, point format is used for most of the content to keep the document to a reasonable size.

The early years


.Prior to WWII, currencies as a rule were linked directly to the price of gold. The notes (paper money) of that time typically contained text similar to this: "I (the president of the local reserve bank) promise to pay the bearer xx amount of gold on presentation of this note at (the central bank)". Gold was the only real money and paper notes were just that - a promise to pay

.During WWII a meeting was held at Bretton Woods in the US during which it was decided that after the war the dollar would be the only currency directly linked to gold, at a price of $35/oz. All other currencies would be pegged to the US dollar and only indirectly linked to gold. However, the change still meant all currencies effectively remained on a gold standard, even if only indirectly through their peg against the US dollar. When a country's trade balances fluctuated badly enough, its currency had to be revalued, or more often, devalued, against the dollar and, therefore, against all other currencies as well

.After the war the US owned the majority of all official gold; other countries that over time had a trade surplus with the US could exchange their excess dollars for gold at the official $35/oz price. When European countries were rebuilt after the war and traded with the US they, France in particular under Gen. de Gaulle, used this opportunity to its full effect to obtain an own gold reserve

.In the mid 1960s the cost of the Vietnam War and President Johnson's effort to eliminate poverty in the US, his 'Great Society' plan, caused the money presses to work over-time. Even though inflation was low, a dollar peg at the fixed price of $35/oz meant that by that time gold was becoming cheap and more and more US gold was leaving the US for Europe, much of it to France, not to return

.Much needed support for the dollar to reduce the outflow of US gold was then arranged by the Bank of England; a syndicate known as the 'London Gold Pool', was formed with the purpose of buying gold in large quantities to keep the dollar peg intact. By the late 1960s it was clear their effort could not succeed and by 1971 President Nixon took the dollar off the gold standard. Currencies started to float against the dollar and each other, while the official price of gold was raised to about $42/oz. The free price of gold had started to move steeply higher, as it responded to the normally market forces of supply and demand

.Rampant inflation in the US during the 1970s sent the price of gold much higher. After hitting a peak of $850 in 1981, President Reagan's major remake of the US economy had inflation falling steeply and therefore also the price of gold, which later settled for some years in a sideways band below $400/oz

.After his election in 1992, President Clinton introduced various plans to boost the economy out of the recession, which had kept the GWH Bush presidency to just one term. These plans included a loose monetary policy and increased printing of money; as a result, by early 1996 the price of gold had broken higher, clear of the $400 barrier. This break higher came out of a large triangular pattern that traditionally signaled the start of a strong bull market. When the price suddenly reversed direction to fall clear below $400 and also the triangle, this unexpected behavior grabbed my interest to begin a study of the gold market

The gold carry


A 'carry' in the trading sense is when one commodity is borrowed and sold so that the money can be invested in something else that provides a higher return than the cost of the borrowing. The new suppression of the gold price commenced in the mid-1990s as the Bullion Banks - those big New York banks active in the gold market - borrowed gold from central banks at near 0.5% interest (because of the very low risk that the gold would not be returned) and sold it to invest in US long bonds that at the time paid above 7%. Where the old 'Gold Pool' was common knowledge, this new effort was kept quiet and covert.

• This was such an easy trade to do that banks practically queued up to take part in the 'gold carry'. The result was too much supply coming into the market, and the price fell steeply and consistently. This was the real objective of the central banks in their eagerness to lease out gold as a covert plan to support the dollar against the price of gold - the true barometer of what a currency is worth
• One potential problem with the gold carry that apparently was not of concern at the time, was that when the banks were due to return the leased gold, they may not be able to do so. It was perhaps assumed that the leased gold would remain in vaults somewhere and could be purchased by the banks again at a lower price than at which they had borrowed, to make a capital profit as well. After all, they had borrowed close to $400/oz and their selling was causing the price to fall; if they could buy back gold at say $350, or lower, they would make massive profit over and above the profit from the carry
• As it happened, too much of the gold sold in this way ended up around the necks and arms of women all over the world, especially in India - where gold jewelry is wealth and is not traded or sold except in emergency. In addition to the problem of possible lack of supply, during this orchestrated bear market in gold various global events triggered a sudden rush to the traditional safe haven - gold - and the gold price jumped. When this happened, central banks acted in panic, first to an Asian financial crisis and shortly thereafter to the default on foreign loans by Russia. They employed two desperate means to keep the lid on gold when it turned so bullish in response to these events:

​

◦The central bank of Switzerland, out of the blue, announced they would sell half of their 3600 tonne stash of gold 'for humanitarian' reasons. The announcement consisted of only two sentences; when asked, the Bank said the details were not as yet finalized and would be announced later! Strange behavior from the normally so conservative and precise Swiss?
◦The Bank of England (their central bank) announced they would sell half of their store of gold by a series of auctions. The way these auctions were conducted is most weird. The lowest bid price that would clear the gold on auction was to be applied to every bidder that had bid at a higher price - almost as if it was the full intent of the auction to keep the market price of gold as low as possible!!

• All of this brought the gold price to $250 by about 2000, when a new problem arose; mines started to reduce production, or even close, because the gold price was below the cost of production - as has just recently happened again. This imminent reduction of supply into the market - at the same time as increased safe haven buying ahead of, firstly, the 2000 century change and then also after the 9/11 event - caused the gold price to begin a recovery.

The Comex years

• Because rates were so low that the gold carry was no longer profitable enough for the degree of risk and the price now clearly had more bullish potential than bearish, the banks were careful of borrowing and selling gold to keep the price low. This meant another means to do so had to be found. This method worked well in the rising trend of the price and has been in use for the past 15-16 years
• For more than a hundred years now, the price of gold is set in London by some member banks of the 'London Bullion Market Association (LBMA)'. These banks have a close link with the NY bullion banks and some are even the same. While the London Gold Pool had to fail because the supply of gold they could get to sell was limited, the Comex metals futures market has no supply problem - they are a market for trading in 'paper gold' and the supply is almost unlimited by design
• As gold started what became its longer-term bull market in 2002, the Bullion Banks (BBs) would sell futures contracts in volume, going short of the market. At a suitable point and with good timing in terms of outside events, they would suddenly sell a very large number of contracts in a few days, forcing down the price. Buyers, still remembering the previous 5-year steep bear market, would panic and run away and holders of long positions would close their positions as soon as possible, even if it meant a loss. At a suitably low price, the BBs would begin to buy and close their short positions at a very good profit
• For many years, these regular bear raids by the BBs were major affairs, typically many months apart. The gold price often would fall more than $150-200 and it would take some months before buyers returned to the market. The resulting interruption of the bull trend suited the central banks, while the opportunity for almost risk free profit was all the BBs wanted. This method of keeping the price of gold under some control would work as long as there was physical gold to sell for buyers who really wanted the metal
• However, by September/October 2011, with the gold price nearing $2000, the gold bulls were winning the long drawn out battle. At that time the BBs struck; a major and sustained period of selling many contracts almost daily, had the gold price trending steeply lower - to be followed by two years of volatile swings and, again, the development of a large sideways triangle. As the price completed leg 4 of the triangle, ready to begin leg 5 and then break higher above the triangle, another bout of heavy selling of paper contracts in April 2013 caused the price to collapse below the triangle in a déjà vu event! It is reported that the equivalent of well over 200 tons of actual gold was sold over a weekend in April when the markets were almost deserted and the selling then continued into Monday as the shell-shocked gold bulls threw their long positions away at any price. Of course, this sell-off helped the BBs to coin money hand over fist
• During the next two months, the gold price fell in staggered fashion from $1577 down to $1192, dragging in new bulls whenever they saw the selling was halted in the hope a bottom had been reached; only to be knocked out when the heavy selling started again to add even more to BB profits
• The past three years since the steep fall have seen a slowly descending but still quite volatile bear trend. Any bulls that tried to get back into the market were soon stomped out again by what has now become known as 'waterfall attacks'. Rather than one long lasting attack on the price, as used to be the norm prior to the 2011 high, it seems that the BBs decided more efficient use of ever declining gold reserves could be made by intense selling of paper contracts over a span of only a few minutes, resulting in what is also known as a 'flash crash'
• The war on gold in the paper market could only work as long as enough gold was on hand to satisfy a relatively small physical demand mainly from investors and jewelers. During 2015 gold bulls were becoming more confident that with China and India buying gold that on some occasions exceeded annual production, the paper war soon would not have enough of the actual metal to support it. Once a demand for gold cannot be satisfied at the artificially low paper price, buyers will raise their bids to obtain gold. As this happens more and more, the gold price soon will be set in a physical market, not by the Comex paper market, as has been happening for decades and that would mean the end of the war
• In April of this year, China opened a gold and silver exchange in Shanghai where the trade happens in the metal itself, not as a paper contract. When a contract expires, there has to be actual delivery of the metal. A seller of a contract has to have the actual metal in the vaults of the exchange in Shanghai. On the Comex, a similar rule should in principle apply, but the Comex rules for gold and silver differ from all other commodities, offering much greater freedom for the BBs
• From the beginning of 2016 the market seems to have changed; for the first time since the steep bear market in 2011 the gold and silver prices are making headway even when under severe selling pressure, such as has been happening recently as gold tries to break above $1300/oz and silver has a ceiling at $18. As soon as prices near these levels, the number of mini flash crashes that typically occur a number of times each day, increases substantially to force prices lower

T
he charts above are intra-day prices as these appear on www.kitco.com; the chart on the left is gold, with the silver chart on the right.


Currently


The new bull markets in silver and in gold - which according to long term charts should run for a number of years - are now more than 4 months old. The rising trends have not been smooth; some days prices increase quite smartly and then - often near a 'round number' for the price - there would be 4-5 'waterfall' attacks at short intervals, each of them pushing the price down by a relatively small amount, but building on the previous fall in the price to have a significant overall effect.

A big change from the past is what happens at the end of a waterfall; previously, a raid or attack would have a lasting effect on the price; it would drift sideways for some time before buying gradually takes it higher. Nervous buyers would wait before returning to the market. During the rising trend in 2016 - and even to some extent late in 2015 - this pattern of behavior changed; as the silver chart above shows (it was copied later in the day than the gold chart) buyers rush in to get bargains after a waterfall attack.

The consequences of this greater optimism and determination of gold bulls are of great importance for the market and for the suppression scheme in use. It is to be expected that fewer longs would panic and close positions in reaction to the waterfall attacks, in part because so many contracts are well into profit, but also because of fear that a long position that is closed cannot be opened again later at a lower price. This change in the sentiment also brings bargain hunters into the market whenever the price reacts to the depletion of the bid stack by the waterfall attack.

This means the BBs cannot close their short positions as easily as before and is a sign that the buyers know they are getting the upper hand; while the possibility of a major and sustained attack is not zero, but is now small enough that they hold onto their long positions, even if the price falls. No more stop loss for most of them.

The result is that the BBS are no longer able to close enough of their short positions to reduce their overall short position to a safe level. They are compelled by the way bulls now behave to increase their short positions every time they decide to attack the rising trend in the market. This has brought total open interest in gold futures on Comex - and silver as well - to all time record levels, making the BBs very vulnerable to a squeeze.

At the same time, gold is becoming more scarce. Each long contract on Comex has the potential to ask for delivery of 100 oz of gold from the seller of the contract. The rule is that a seller must have 'own' gold to the extent of the number of contracts that are being sold. At least part of this gold has to be kept in one of the Comex's regulated vaults, known as the 'registered' gold in the vault to distinguish it from other gold that is stored on behalf of its owners for safekeeping only.

Most people active in the gold futures market are trading and do not ask for delivery, so that it is not a crisis when a BB sells more contracts than the gold it keeps in vaults at Comex. Previously, with gold plentiful and BBs easily able to cover short positions whenever they spooked the market causing longs ran for cover, the ratio of total open contracts to the amount of available gold remained low for many years. This meant there never was any fear of default, i.e. a failure to meet a request for delivery.

Since late 2015 the situation has been changing for the reasons noted above. As the BBs experienced greater difficulty to close their short positions after a hit on the price, the open interest of the gold contracts grew rapidly to reach all time record highs. By far the greater proportion of short positions are on the books of the BBs. They not only have to carry an increasing amount of margin, but also face the risk of default as more buyers decide to take ownership of the metal as a longer term investment rather than to try and trade futures in a consistently rising market. The chart below illustrates how much recent buyer behavior has changed this aspect of the market.


Historically, the number of open interest contracts for an ounce of gold in the vaults - also a good indication of the total short position of the BBs - since 2000 remained in the lower digits until about 2010. That was when China joined India at the top as a major purchaser of gold and the slight rise in the ratio after 2010 might be explained by gold becoming less freely available! From 2013 the gold cover of total open interest worsened rapidly, only to explode in 2016, when the gold bull market kicked off.

Given the changed situation with respect to gold futures and the role of the BBs, there seems to be only a low probability of the gold bulls allowing the BBs to reduce their short positions to any significant degree, as they had been able to do previously. It means that a large and sustained inflow of gold into the vaults is needed to ensure that the situation does not get completely out of hand. Also, given the way China and India are buying gold, that prospect too seems to have only a low probability. This means the situation can be expected to get worse, not better.

Yet something specific needs to be done urgently to avoid a catastrophe for the BBs and for Comex - one that would propel gold and silver into totally new high ground. And it has to be done quite soon, in weeks to months, not years. The situation at Comex, as the chart clearly shows, could disrupt one of the biggest financial markets in the world, with wide ranging effects on many other markets.

Just about everything said here about gold also applies to silver. Its manipulation may not have started as early as for gold, in part because at one time the US government had a massive strategic stockpile of silver that could be sold as demand increased - which happened; the stockpile has been history for a decade or longer. The industrial demand for silver is much higher than for gold and with silver mines closing production as the price fell too low, silver in time seems to have become a greater threat to the financial stability of the BBs than gold.


The future


If the above discussion holds true, the BBs find themselves between a rock and a hard place. The simply have to keep on with waterfall attacks to restrict the gold bull market as much as possible; should the price break free, the margin calls on them will escalate into the financial stratosphere. Secondly, a steep bull market in gold will cause many longs to consider having their hands on the metal itself will be much better than having a long futures position; their requests for delivery will risk default.

On the other hand, should they discontinue the waterfall attacks, the gold price soon will accelerate higher, with rapidly increasing margin calls on their already large short open interest and still with the risk of default should requests for delivery increase, as is then to be expected.

A third possibility is that, somehow, enough gold can be procured to launch a really major offensive on the price and push it down low enough to trigger large scale closing of long positions to enable BB short positions to be closed. If that option does prove to be feasible, the price of gold could be depressed back to where it was in 2015 to defuse the current risk. However at that time it has to be decided whether suppression of the gold price is to continue - resulting in the same critical situation as now exists - or whether the gold price will be left alone to make its own way into a new bull market.

In terms of Comex rules there is also the possibility that when default on delivery is a fact, a condition known as 'force majeure' can be invoked; it is in the Comex rules to make provision for when a natural unforeseen event prevents delivery of a commodity against a request, in which case the contract can be settled in cash.


In the gold and silver futures market a need for force majeure will not be because of a natural and unforeseen event, but because of the illegal suppression of the prices, and because Comex did not properly supervise the market. Comex then inevitably will lose all credibility - something Comex would like to prevent at all costs.

Even without any other factors that could come into play, a bullish future for gold and silver over the longer term seems certain. The move higher will not be without hiccups, but it should be steady and sustained when viewed over a longer time scale. These two metals therefore present opportunity for safe haven investments with prospects of very significant capital gains over time. In this respect, many analysts consider that silver is the better opportunity, because it has been suppressed more than gold.

Investing in gold and silver can be done by buying mining shares, through an ETF on a stock exchange or by buying coins or silver bars. Mines offer high gearing and should be part of any portfolio. ETFs offer easy trading opportunities, but carry some risk over the longer term. Owning the metal itself carries no counter party risk, but has a safety risk unless these are stored in secure vaults or other suitable places.

Regards and take care

Daan