Posted on 08/12/2011 7:20:45 PM PDT by blam
Think Gold Price Is Not Manipulated? Think Again!
Commodities / Gold and Silver 2011
Aug 12, 2011 - 07:27 AM
By: George Maniere
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.
By George Maniere
Gold contracts come in 100 oz chunks. It is the silver contracts that are 5,000 oz based.
(I know you didn’t write the article, so just sayin...)
Which is why you can’t have a gold standard.
Can you explain that statement to me?
I have been told by some on Free Republic that everybody needs to have gold for when the economy collapses...that it is “insurance” and for “wealth protection”...but I am not seeing it. If the economy would collapse in the U.S. I would think we would drag down the rest of the world with us along with the value of gold. If that would happen, then how would gold be valued...I would not think it would be valued in U.S. dollars...current price $1800...future price ????...
If value is driven be supply and demand, then if demand dries up...do to economic collapse...and supply remains the same...how does gold retain its value?
My original discussion on FR about gold happened when gold was trading around $1300 and I had the option to buy an ounce or a bred cow for the same price. I bought the cow and others could not understand why I would...since then gold has gone up to $1800 while my cow gave birth and raised her calf...she gave us so much milk that I decided to buy a bull calf (to drink some of that milk) to raise for meat (cost $10). So for my $1310 “investment” (plus feed around $500) I have now sold the cows calf, have a steer that will provide around 600 pounds of beef for the freezer, and fresh milk every day. If I go with conservative numbers that would mean for a cost of $1810 I have a return of...calf sold for $700 plus, 600 pounds of beef at around $3.00 per pound equals $1800, and around 250 gallons of milk at $2.50 a gallon (currently around $3.50 here) equals $625 for a total of...$3125. And I still have the original cow to start over with...or I could have an ounce of gold.
If the economy would collapse I can still feed my family with the things that the cow can provide...and barter with some of the things as well. Gold would only provide me with substance if I sold it...if I could find a buyer...and then it is gone.
Am I missing something about gold being “insurance”?
“I do not expect to survive the chaos undamaged, but I do intend mitigate the damage by eliminating debt and buying real assets as paper dollars become available to me.”
What you have written makes sense to me. Can I ask what do you classify as “real assets”?
It’s more banal than that. It deals with growth and if you outpace growth trouble begins.
Governments get into trouble because of debt. Either they spend to much or going to war requires funding or investors are not happy with a 1% to 5% growth rate so money/credit is created to satisfy the greedy and/or the directive (like a war or pie in the sky programs).
And the US prints bonds and no so much money. The only real
‘new money’ is the interest paid to bond holders because even Red China is not dumb enough to dump US Treasury paper or the US dollar would crash becoming worthless so they sell the long paper and immediately buy short term paper and slowly invest/convert US holdings to tangibles like rare earths and grains, mainly because they have to, to keep their economy moving forwarded but do this very slowly as not to drive their own dollar holdings down by injecting to many dollars into the financial world at one time.
If you can sell the debt to others like when Nixon sold China our debt or if you can’t sell the debt then you devalue the currency by gathering up the gold then set a new price or print more paper money or create a war to hide your short comings in the economy...the Ponzi scheme in debt seems endless but it is not, always ends with a reset after much pain and suffering borne by citizens that finally revolt in some fashion that forces the issue of resolving debt.
Then human nature kicks in and the cycle repeats, throughout history it repeats...You just happen to be living at a time when financial systems are about to reset.
Gold is an indicator of confidence in governments and their fiats. As long as money is changing hands (inflows and outflows) dependent on any one thing, it can be played as an investment... or loss.
I agree that the basket scenario is the most likely, but it won’t happen anytime soon. And certainly not before a cataclysm. The near future holds more money printing as a short term fix.
Yep, land, equipment, maintenance, vet supplies, labor, taxes and risk on your calculations of return.
That said, I agree 100% that a person should acquire necessities first. Are you going to buy another bred cow once you have an extra $1,700? What about if you had a couple hundred thousand dollars to invest???
Just sayin'...
That sounds more reasonable.
Thank you. This whole subject of debt and inflation has been one I have been paying attention to for a couple months. The post is how the product of that ongoing study and not fast typing. Not too hard, because I worked in accounting, finance and investments until I retired. Monetary policy first captured my interest in graduate school in graduate school.
“Yep, land, equipment, maintenance, vet supplies, labor, taxes and risk on your calculations of return”
And gold ownership doesn’t come with extras as well? Where is the gold stored...safe deposit box, a safe, under the mattress? All have either expense or risk tied to them. If the value of the cow goes down I can still eat it and get the full value I paid for it out of the meat in the animal...if the value of gold goes down you lose money. That is the reason I still do not see the “insurance” side of owning gold...I understand the risks of a cow, but I also understand the risk of owning gold...
“Are you going to buy another bred cow once you have an extra $1,700? What about if you had a couple hundred thousand dollars to invest???”
At this point I would not need to...the cow will be bred again shortly...but I could buy another one now if I wanted to since I do not need to buy milk or meat for the family, there is extra money available. If I did have a couple hundred thousand dollars to invest I would buy more land to increase the size of the hobby farm...I can provide for my family currently on this farm but the family is growing so eventually we will probably need more land...and then I could probably raise my own hay for winter feeding reducing my costs even more...that is our long range plan.
I can put my gold coins in my pocket and fly to a foreign country with them and then exchange them for the currency of that country. Can you really do that with your cow? I have a barn and could put a couple of cows in it but I’m a very busy man, I don’t have time to play farmer. Now then, If you took the cash profit from your cows and bought gold with that, your profits would be protected against the eroding nature of fiat currency. Or, you could stick it in the bank and watch it become worth less and less. Or you could buy more cows. that too comes with its own set of risks of course. Gold doesn’t get sick and die for example. Having said all of that, if I had more time, I would own a couple of cows and a coop full of chickens and a pen full of rabbits. As it is, however, I have a degree in nursing and that is my biggest asset right now.
just make an ounce of gold worth $25,000 instead of $1750 and it works. or 50,000 dollars. you get the idea.
It's much easier to hide a gold coin than a COW! lol
Agriculture sounds like a great plan. Best to have a little gold and silver also. It's portable, easily hidden and much more liquid than most other types of property.
if the value of gold goes down you lose money.
Have you ever heard the comparison of what gold will buy and how it hasn't changed through the years. It's the value of the dollar that's dropping. Certainly there is variation but some gold/silver is indeed good insurance. Maybe a few thousand dollars of 90% silver would be the better plan.
If you get a chance, read what happened at farms during the Wiemar republic.
That 200 trillion, is that counting all the crap and toxic waste thats been spewed out as “investments”?
No it doesn’t. The increase in the money supply would be dependent on how much gold you are producing. The existing stock is how much you already possess. So countries with no gold have no money? The US is in the top five producers, but only produces a fraction relative to the GDP. China is the biggest producer, but has a small stock of gold. Canada is a big producer, but owns no gold. Invade Canada to increase your money supply. Also, at the numbers you quote, between your house and the nearest Starbucks, there would be 3 dirt hills as people dig for the metal.
Maybe I need to ask the question a different way...If I would buy gold with my profits at $1800 and then the price of gold goes to $1200 then how is that “protected against the eroding nature of fiat currency” any better then any other investment in real assets?
For the record...I have the cow, a small flock of sheep (yes we spin our own wool), a coop full of chickens, and a pond full of ducks...we got rid of the rabbits (the children didn't like the taste of the meat).
“I have a degree in nursing and that is my biggest asset right now.”
I some what agree with you...our biggest assets aren't what we own (be it gold or cow) but our knowledge and I would add our relationships with others. With having the farm my children have been able to learn skills that have led to them landing jobs in this poor economy...and those jobs have led to an increase in other skills...
I’m pretty sure the chart includes toxic assets. The chart was put together in 2010. I think it’s much larger than 200T now.
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