Gold Moving UP - Y2K Referencedgreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
From the Freemarket Gold and Money report............
I believe that within two weeks, another Gold squeeze will start from the depths of a typically hot and humid New York summer. Like the squeeze of 1869, the market now is far too complacent about both Gold and the fiat currency of our day, the Federal Reserve Dollar ( which differs from a Greenback Dollar in name only ) . And conditions are ripe for a successful squeeze, most notably in the low Gold price and high Gold interest rates.
At $260, the price of Gold is abnormally low, while at the same time, Gold interest rates at 3% plus are abnormally high. In contrast to the Dollar and other fiat currencies which can be manipulated to any artificial end determined by the central banks that create them, Gold is money that depends upon the freemarket process. The reason? Unlike fiat currencies, Gold cannot be created by bookkeeping sleight of hand out of thin air. Therefore, central banks do not have an unlimited supply of Gold, which is the necessary ingredient for any ongoing successful central bank intervention. Consequently, central bank manipulation of the Gold market has limits.
In order for interest rates to return to normal, i.e., under 1%, the Gold price must return to normal, i.e., some price over $400 per ounce. This high Gold price is needed to bring metal back into the market, thereby increasing liquidity, which in turn will cause Gold interest rates to drop toward normal levels.
The abnormal conditions now prevailing in the Gold market provide the opportunity for the spike. And the spark is being provided by Goldman Sachs.
This past Thursday, Goldman Sachs responded publicly to its actions taken over the past few days behind the scenes on the Comex. Goldman announced that it had given notice to the Comex that it was standing ready to take delivery of about 473,500 ounces of Gold, about one-half of the total weight in Comex vaults. It was according to a Goldman spokeswoman "all within the normal course of business." While taking delivery from time to time is of course entirely normal, the weight of this delivery is far from normal. Further, Goldman is said to control most of the 3,537 August contracts still outstanding, meaning that it could take delivery of even more metal, possibly nearly depleting Comex stocks.
What are the reasons behind this move by Goldman? Well, let's see if we can put two-and-two together.
There have been rumors and some press reports that the big Tiger hedge fund is in trouble. Apparently, even though this hedge fund reportedly has a sterling long-term track record, their performance this year has been poor. Importantly, in the continuing aftermath of last October's Long Term Capital Management debacle, investors in hedge funds these days are not very patient _ they are withdrawing their investment quickly at the first hint of poor performance. Thus, Tiger has been suffering withdrawals of capital, which has required Tiger to liquidate investments to provide the funds needed to meet these withdrawals. Now here is where it gets interesting.
Australia's largest Gold mining company is Normandy Mining ( NDY ) . According to NDY's fourth quarter report dated June 30th, Tiger owned 11.68% of NDY. At present prices, the face value of that position is about US$156 million, surely not one of multi-billion Tiger's biggest positions, but nevertheless, it still is a big chunk of change.
Tiger acquired this stake from another Australian company a couple of years ago around A$1.75. NDY is now trading at A$1.20, and before the latest run-up in the Gold stocks was around A$1. But don't shed any tears for Tiger.
As I understand it, Tiger did what most hedge funds do; they hedged this position. How? Tiger had sold short Gold bullion, and its gains from this short position as the price of Gold slid lower have more than offset the losses on the drop in the NDY stock price. But these are paper profits, and now the hard part for Tiger begins. How do you unwind this huge position without eroding your paper profits? Taking profits becomes exceptionally important when you need the cash to meet investor withdrawals, as Tiger apparently now does.
The first thing to do is buy the Gold needed to cover the short Gold position, and here, Goldman once again enters the picture. The metal now being accumulated by Goldman on Comex will I understand be delivered to Tiger, to enable Tiger to cover its short Gold position. What I hear is that Tiger will then unwind its long NDY/short Gold trade. In other words, Tiger has already purchased this metal on a forward basis. Goldman is Tiger's broker on this trade, and Goldman will deliver to Tiger the metal Goldman will obtain from the delivery it is taking on Comex. Here's where it gets really interesting.
During the delivery of any month, it is the shorts that choose the time to deliver on their short position. The longs have no option but to wait for the shorts to decide when to deliver, and normally the shorts wait until the end of the month This slowness to deliver is understandable because it enables the shorts to earn interest as long as possible. This month the shorts must deliver by August 27th, which in Comex terms is the end of the month. Somehow and from somewhere, the shorts must come up with 473,500 ounces of Gold bullion, and possibly more if Goldman takes delivery this month on even more Gold.
No problem, you say, because there is 948,973 ounces of Gold in Comex vaults? Well, that is true. But who owns that Gold? What if none or few of those ounces are owned by those who are short the Gold that must be delivered to Goldman Sachs? In that case, where will the shorts get the Gold they need to deliver to Goldman?
Therefore, on or before August 27th, which is the last delivery day, one of three things will happen, AND IT ALL DEPENDS ON WHETHER OR NOT THE SHORTS OWN THE 948,973 OUNCES OF METAL IN COMEX STOCKS.
1 ) If the shorts own this metal, they deliver metal to Goldman, and the Comex stocks will drop by 500,000-700,000 ounces ( which is the weight that I expect Goldman to wait for delivery ) . The upward pressure on the Gold price in this case may be muted, and the squeeze in all likelihood averted for the time being. If so, all the shorts who have driven down the Gold price to its abnormally low level can continue for now to wring out every penny from their short position.
2 ) OR, IF THE SHORTS ARE NOT THE OWNERS OF THE METAL IN THE COMEX WAREHOUSE, we will get a huge short squeeze as the shorts try to find metal to meet their commitment. And I do mean HUGE, because there is no metal in the pipeline not already committed. The high Gold interest rate is a stark warning to the shorts that metal is not available.
3 ) Or finally, the market goes berserk because of the short squeeze and the Comex announces a repeat of what they did to Bunker Hunt, i.e., horrendous cash margins and only trading for delivery into Comex stocks is allowed. This alternative will probably prevent the short squeeze from reaching its full potential, but the Comex cannot be expected to act until the short squeeze has already begun. So there is still plenty of opportunity to make a lot of money on the spike that I expect in the Gold price.
The potential now exists to make the 1869 short squeeze engineered by Fisk and Gould look like child's play compared to what is coming up, if we get alternative #2 above. And my own guess is that we will get #2, but this is just my guess.
One other bit of info. Apparently, Goldman did not want to take delivery of this Comex stock ( which they obviously knew would bring a lot of public attention to this move ) , but Goldman had to tap Comex. The reason? Goldman could not get their hands on this metal from any other source! There's nothing in the pipeline of this size not already committed, so this shortage of metal will add fuel to the fire of any short squeeze. This shortage of metal also explains why Gold interest rates are so high because as I have been saying in recent letters, there is no lender of last resort to the bullion banks.
Without any doubt, it should be an interesting couple of weeks! In nearly 30 years of commodity trading, I've never seen anything like this before, but the upside could be spectacular, even bigger and better than it was for Fisk and Gould.
THE BIG SQUEEZE If I've learned anything over the years, it is to not underestimate the power of central banks and their willingness to play 'hard ball' to enable them to keep their hands on that power. Witness the Gold sale by the Bank of England as evidence of my proposition. So if a big squeeze in the Gold market does occur, will the Federal Reserve stand idly by? Probably not, because I doubt very much whether the Fed would like to see the Gold price scoot to $500 per ounce in a fortnight.
We must therefore try to think through the other options as to what could happen if the Federal Reserve sticks its nose into the Gold market, if it hasn't already done so ( some argue that the Fed already has its hand in manipulating the current low Gold price ) . In any case, some of its options are:
1 ) The Fed gets its central bank pals to lend metal, throwing to the wind any concerns they may have about the solvency of their counterparty and/or about their need for metal as Y2K approaches. This action would keep the Gold price and Gold's interest rate tame, much like what has happened since 1996.
2 ) The Fed gets more central bank pals ( like Bank of England ) to dishoard Gold. This option would accomplish much the same as #1 above.
3 ) The Fed brings in the federal government to intensify its anti-Gold media campaign. The nameless 'specs' are about to get bombarded with bad press if Gold begins to rise. The Fed will arrange with the media to get many quotes from friendly sources talking up what the Fed wants you to hear. Left unsaid of course will be the huge short position in Gold established over the past few years with central bank connivance, which has created today's abnormal conditions in the Gold market and made a squeeze possible.
4 ) The Fed gets the federal government to force the IMF to sell some of its Gold and/or to return Gold to its members, which will then be loaned and/or dishoarded by them, thereby providing enough metal to postpone the squeeze. These actions would also allow the abnormal conditions in the Gold market to prevail somewhat longer.
5 ) If all else fails, then the Fed asks the federal government to close down the Gold market and/or to confiscate Gold like Roosevelt did in 1933, thereby providing the opportunity for them to get their hands on enough metal to relieve the squeeze. This time though, the Fed would probably get most countries to participate in the closure/confiscation as well.
But if #5 happens, then I think the implications will be even far greater than just trying to prevent a Gold squeeze. We will in that case be witnessing the end of fractional reserve banking, a system fostered by central banks since the creation of the Bank of England in 1694. In other words, it will mean the end of the cartel given by governments to commercial banks to bilk a country's citizens in exchange for the power that commercial banks, through their ability to create fiat money, give to governments. What power is that?
Governments survive on fear and power, but they cannot create bullets out of thin air. So what do they do?
Through their captive central bank and partners in crime, the commercial banks, governments create money out of thin air to buy bullets. This observation explains what central banks work so hard to preserve, but the implementation of #5 above will show how desperate the central banks have become and how little power they have left to prevent a systemic collapse. There are parallels to the waning days of the Soviet Union, which could not in the end prevent the fall of the Berlin Wall, let alone the collapse of its unconscionable people control system.
In short, banks and governments will no longer have the ability to work hand-and-glove toward their objectives, extortionate profits for the banks and unbridled power for governments. And it won't be a pretty sight.
The ultimate irony? The worst predictions of the Y2K doomsayers come true, but not because of computer problems and glitches. Rather, the monetary system built upon nothing but promises collapses because people finally realize that sometimes promises mean nothing, and if promises mean nothing, then the money from a monetary system built upon promises is worth nothing.
-- Bill P (email@example.com), August 18, 1999
Bill, these guys have been pushing gold since I was in short pants. Had me interested in it for a while, too. But every prediction they have made about rising prices since 1979 or so has been wrong. If gold rose to $300 over the next couple of months they would claim vindication - and so what? That would only be 3/4 of the way back to the 'glory days' of $400 per ounce. And the Goldman/Sachs buy is a teeny fraction of the gold being dumped on the market by several countries.
Hey, if you want to hold metal, buy platnium or silver. They have held up MUCH better than gold because they have industrial applications. Or buy high grade proof sets. But there just is no justification for buying gold for gold's sake.
-- Paul Davis (firstname.lastname@example.org), August 18, 1999.
Found this over at www.kitco.com in the discussion group...
Date: Wed Aug 18 1999 10:24
SlangKing (This guys takin Aurators crash contest too seriously)
ID#276277: London -Monday
Trader buys #600m 'policy'
A MYSTERY trader sent the City rumour machine into overdrive yesterday by buying an insurance policy worth #600m against the FTSE 100 falling by almost a third in the next four weeks. The deal was made through an independent trader, hiding the identity of the party, but speculation centred on the large US hedge funds or an American bank. By buying 10,000 put contracts at a cost of #400,000 the trader hedged against a 29pc drop in the FTSE 100 by September 16.
-- jolly well shan't tell ya (email@example.com), August 18, 1999.
Wow, what a brilliant analysis by Paul Davis, I guess if Goldman Sachs learns of it, they will cancel everything. "Yeah, I looked into the gold thing back in '71, there is nothing to it."
You are the biggest frigging educated MORON this forum has. Even double Decker would put SOMETHING out there with SOME amount of substance, no matter how slight and deceptive.
Go play with your telescope. Look for doomers planting dope or something. Dumbass.
-- King of Spain (firstname.lastname@example.org), August 18, 1999.
Sounds like this bears watching. Is it Best to hold gold? Or is cash still ok? What's your guess?
-- Thomas G. Hale (email@example.com), August 18, 1999.
Cash talks, gold will be difficult to convert to cash. Cash will be quicker and easier to trade than gold. If gold is suppose to go up, why are countries dumping their reserves?
-- Jim Smith (Jim Smith@WMBCC.com), August 18, 1999.
I am not an expert just another player trying to keep my head above water while there are leaking holes in the boat. My opinion for what it is worth is:
I would NOT buy gold or silver as a means to transact business in 4th qtr 1999 or 1st qtr 2000. I agree "Cash will be king" and suspect we may see again the "discounts for cash" at the pump and other cash based businesses. Rather, I would make gold and silver part of my strategy to shelter some from value from either extreme inflation or extreme deflation. Gold like other commodities has an excellent record of tracking inflation. It is a good portable store of value. If we enter a period of deflation, It is my understanding that spot gold prioces in the $260 per ounce range is about equal to the cost of mining and refining gold from ore so the downside risk seems minor. Of course the estimated costs for mining and refining is in 1999 dollars and that cost could vary based on fuel prices, labor rates, political stability, etc.
So I would split my reserves into some physical gold and silver along with cash.
As to why the central banks of many countries are interested in selling gold when gold prices are at record lows, one can read much from the experts that offer a variety of explanations. The explanation that makes the most sense to me in August 1999 is that many government Treasuries and Central Banks are already experiencing a liquidity squeeze as more demand return of assets or redemption of investments. To raise cash, some Central Banks may be forced to sell of their holdings that have marketable value, like gold. Depending on your belief in a "cabal of elite bankers" running the world there is some who claim that gold prices are being manipulated by shorting large blocks of gold futures - as long as the rpice goes down the shorts make money.
-- Bill P (firstname.lastname@example.org), August 18, 1999.
I have not invested in gold because I consider it difficult to use in trading if an ounce of it is worth several hundred dollars. But I am interested in why the price of gold should be set in the neighborhood of $400.
If memory serves (and it frequently does not) when the dollar was tied to gold, an ounce of gold was worth somewhat more than $35.00. Perhaps it would be more accurate to say that the dollar was worth about 1/35 of an ounce of gold.
Anyway, it would seem to me that the value of gold has probably remained pretty much the same and it is the value of the dollar that has varied. So if the price of gold increases, it will indicate that the dollar has lost value.
Is my thinking reasonably correct, or am I missing something? I agree that if we are moving in the direction of inflation, gold would be a good investment, assuming that your basic needs are already provided for.
-- gene (email@example.com), August 18, 1999.
The one thing I have not heard commented on in all the gold talk is what about Russia? Russia is one of the larger gold mining countries and don't they very large reserves, and are they selling, holding, or trying to find out who stole it?
-- chicken farmer (chicken-farmer@ y2k.farm), August 18, 1999.
What a person buys (gold,silver,platinum) depends upon the use. For someone who thinks that a barter economy is in our future, silver is a good choice. My dealer doesn't recommend silver eagles because the premium is extremely high over spot price (25% plus). Rather, if you wish to save some to barter just in case, 1 ounce englehard rounds or 'junk silver' 40% or 90% silver coins (quarters, dimes, etc.) are a cheaper alternative. Be warned though that other people are thinking this and the price of junk silver coins has risen this year.
As far as gold goes, at a 22 year low, there seems to be a lot of upside for profits, as what goes down eventually goes up. When will gold go up? Your guess is as good as mine. Gold has historically been a good hedge against inflation as there doesn't seem to be a reason why this should not continue.
I don't claim to be a gold expert, so take my advice for what it is: a novice's opinion. Otherwise, I've found a good page that has a lot of good articles on gold: www.gold-eagle.com
Good luck and remember: Precious metals investing is not for the faint of heart!
-- cynic (firstname.lastname@example.org), August 18, 1999.
I basically agree with your analysis. Gold once was fixed at $35 per ounce and a dollar could be coverted into 1/35 of an ounce of gold. But if memory serves, Nixon abandoned the gold standard and allowed gold to float. Again if memory serves, this was in 1971 or so. So adjusting for inflation, as you say a change in the value of the dollar, gold should be trading above $300 today.
Supply and demand also affect the price of any commodity. In periods of high stress, gold has been a historic store of value that preserves wealth.
I agree with you as wel. I do not forsee paying for groceries or filling my tank and paying with gold. I see gold as a vehicle to protect assets from either severe inflation or severe deflation.
Personally, I think the financial markets are overextended to the point that even without Y2K, we would be in for a rocky road. With Y2K, I see gold as one step in trying to have some assets available after the dust settles.
-- Bill P (email@example.com), August 18, 1999.
Thank you Bill,
You clarified once again other opinions I've heard before and Have made steps to heed. Thank you for confirming my actions. Just looking for a little clarification and affirmation of my preps.
-- Thomas G. Hale (firstname.lastname@example.org), August 18, 1999.