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Gold Price: Speed Bump or Reversal?
There’s been a dramatic spike in the pro-gold coverage coming from the non-mainstream financial press, and while I in now way claim to know any better than they the future price direction of gold, I do think it a tad premature to be proclaiming decisively that gold has reversed course and will now head toward the $2,000 mark.
JP Morgan recently jumped on the “buy gold” bandwagon pointing to fundamentals in the end user segment driven by India’s annual wedding season demand boost. Hank Paulson’s announcement regarding his funds’ reduction in gold exchange traded holdings by half wasn’t enough to dampen the enthusiasm engendered by the JP Morgan tout and the ensuing message amplification by the plethora of bandwagoneers.
If you subscribe to the idea that the major institutions such as JP Morgan (see J.P. Morgan is bullish on gold even after Paulson dumped holdings) and Goldman Sachs routinely manipulate markets through the publication of buy and sell signals to maximize profits in their futures business, then the renewed interest in gold is more than a little influenced by that news.
Since the uniformly upward trajectory in the price of gold and silver was rudely interrupted by a coordinated futures market attack in September 2011, we have seen repeated fresh assaults on the future price of gold from the same quarter and in the same guise: massive build-ups of institutional short positions, in combination with and apparent buildup of “user” category shorts, lending the appearance of an imminent price capitulation to the downside. Then, the public relations division of the global financial sector – the mainstream financical media- dutifully launches a public relations campaign that looks something like – oh I don’t know – maybe a Wall Street Journal headline that says “Goldman Sachs: Short Gold!”, and BOOM! Down goes gold to set fresh lows while the erstwhile dedicated accumulators of physical react by snapping up all the krugerrands they can get their arms around.
Why the buggy-type gold boosters would clamour so effusively about a couple of feeble feints to the upside in the gold price in August while a substantial number of the purveryors and originators of short contracts are far flung on boats and on beaches enjoying the fruits of past campaigns is beyond me. It would appear to coincide with an absence of reference to the gold futures market manipulation mechanism as the primary sourource for the great weakness in the paper gold price while the price of physical gold remains at a premium. But I’m not here today to malign the rationale of fellow writers-in-obscurity.
Fund managers tend to believe what they need to believe, and if ever they needed to believe that the end to the misery of being an investor in gold and silver and the stocks of their related mining companies was going to happen, now is certainly the time. Though redemptions from resource oriented funds appear to be slowing, there could easily be a renewed disdain if gold gets clobbered with another coordinated Goldman Sachs/Wall Street Journal style of attack.
The general public still uniformly fails to comprehend how the vested interest the United States Federal Reserve and U.S. Treasury share in a sustained underperformance in all asset classes gold-related drives CFTC regulation to accommodate the paper generation of millions of gold ounces to pull the price downward through future short sales. The comments by resource fund managers, newsletter writers, bankers and journalists continuously point to non-existent fundamental influences – like the “recovery” and “the safe haven U.S. dollar”, while ignoring the very real fundamental reality that unlimited paper ounces will easily defeat the number of real gold ounces changing hands when the paper ounces are in fact representative of NO ounces.
With the superficial financial media buzz all about the impending tapering of US $85 billion per month dollar fabrication scheme, and the tendency of markets to swoon at the mere mention of tapering, one must wonder what the nascent recovery among gold miners and explorers will look like if that actually materializes.
And here’s the rub: One of the primary factors encouraging the liquidation of Canadian-listed resource companies is the aforementioned $85 billion-a-month market subsidy brought to you by the United States of Smoke and Mirrors. If the soma drip to the thoroughly addicted U.S. market is diminished, or heaven forbid, ended, then that would unify the direction of markets in a downward trend, and thus redouble the wholesale abandonment of anything TSX Venture-related. On the other hand, if the so-called stimulus is left intact, then the influence of US markets drawing investment away from the un-subsidized Canadian resource sector will continue. Its truly a lose-lose situation.
Real fundamentals in favour of a higher gold price remain intact. Unemployment, municipal bankruptcies, European sovereign debt issues, Chinese economic decline, anemic first world economic conditions, currency and capital fabrication – these are all exponentially larger problems than they were five years ago, and all are bullish for gold. The fact that the futures market creates the illogical and mathematically impossible reality of a declining gold price must at some point prove to be an unsustainable phenomenon, and the real world fundamentals MUST at some point defeat the fraudulent fundamentals of futures.
But I do not believe we are at the point yet where the paper market will crash. That moment will occur when there is a widespread failure to deliver physical gold to those who need it at futures-quoted prices. The growing premium for physical gold over paper gold is surely indicative that such a moment is on the way. I just don’t think we’re quite there yet, and September/October could see another Goldman Sachs/Wall Street Journal moment.