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The Pyrrhic Victory of the Cartel

For months now there we are witnessing attacks on the gold price on an almost daily basis. Two methods are used. The hammer smash, where billions of notional of gold futures are sold within seconds to overwhelm demand and to cause a substantial drop in the gold price. The second method is price strangulation where life is strangled out of the gold price like a Python kills its prey by capping all upward price movements and then dragging the price down slowly but surely. The latter was the more frequent method.

This month we had three spectacular hammer attacks as well. The first one happened on July 7 when almost $1 billion notional of gold futures were dumped in seconds into the open market. The next attack happened on the July 17, this time it was $1.4 billion. On July 20 $2.7 billion notional of gold futures were dumped during Asian trading hours. In total more than $5 billion notional of gold futures were used to smash the gold price down to $1080/oz.

Who are the perpetrators? I rule out any hedge fund or private bank because of the huge sums and risks involved. How could the management of a private entity explain such overt market manipulations to shareholders without having to resign only to become a target for law enforcement agencies? The excellent archive on www.gata.org will help anybody who is interested in delving deeper into this subject. For now I just refer to these people as the Cartel.

The Cartel is in a very difficult situation. It increases demand for physical gold by reducing its price. On the July 20 shares of Indian jewellery companies soared because the public expects increased demand for gold jewellery due to the fall in prices. In 2015 private gold demand in India (more than 1000to) and China (more than 2400to) will be higher than annual world mine production. Add to that central bank buying at last year's level of more than 500to and you will see that demand for physical gold is extremely strong. For a number of years now physical demand has been higher than mine supply. With the smashing of the gold price this situation is getting worse because gold miners shut down and production falls. This year in the US gold mine production is down almost 10%. The South African gold mining industry faces total collapse. The shares of Barrick Gold fell to a 25 year low.

In the past 20 years enormous amounts of central bank gold were lent out to earn interest income. Estimates say that about 30% of all western central bank holdings were on loan. This would be a volume of more than 7,000to. The fractional reserve banking in gold means that 1to of gold can turn into 10 or more tonnes of paper gold. Now this gold is recalled because central banks can not earn any meaningful return through gold leasing and because they worry whether they get their gold back at all. Take Germany as an example. The US told them it would take seven years to return a few 100to of gold which supposedly sits somewhere in a vault in New York.

Is it unreasonable to assume that some bullion banks and the US authorities are now faced with a gold bank run? They appear to pitch for short term gains, a panic or two among gold investors, to pick up their assets to meet delivery calls. It would have been more sensible to let the gold price rise. This would have boosted gold production and the sale of scrap gold and thus enabled them to meet their margin calls. They have already lost the game because the supply of gold is drying up and the world becomes aware of their troubles.

We should sit back and enjoy the show.

 

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