There are some significant developments coming up next week that should bring forth unusually aggressive efforts to suppress the price of gold.
Since the price of gold is a report card on the health of the US economy, government, and dollar, politicians don’t want to look bad by having the price rise as a result of their actions. Well, next Thursday the Commodity Futures Trading Commission (CFTC) will hold hearings on possibly setting trading limits for the gold and silver commodity markets.
In the CFTC’s monthly position reports, they continuously note that 1-4 banks are carrying extraordinarily large short positions in both gold and silver, far beyond what could ever be physically delivered on demand. The CFTC does not identify the banks involved, but it is generally considered that JPMorgan Chase is the single bank holding the huge silver short position and HSBC is one of two banks with the huge gold short positions. These banks are trading partners of the US government who help execute the tactics used to suppress gold and silver prices (including the establishment of huge short positions). Because of this connection, US government officials have no real incentive to limit the gold and silver trading activities of these banks.
When you consider this background information, the fact that the CFTC is even holding hearings on possibly limiting gold and silver trading positions is a significant accomplishment. While some market observers think there may be genuine reforms adopted as a result of these hearings, I am not expecting anything major to rock the status quo. There are lots of ways that loopholes can let these banks off the hook. For instance, trading limits might be imposed on only long positions, while holders of short positions would be unaffected.
No matter what finally comes out of these hearings, the US government needs to look competent at regulating gold and silver commodity trading. Therefore, I expect the prices of these two metals to be knocked down between now and next Thursday.
The manipulation will not end next Thursday. The very next day comes the expiration of the COMEX April options. There are over 30,000 call options on 100-ounce gold bars with strike prices between $1,100 and $1,150. Should the price of gold close on the COMEX next Friday much over $1,100, the owners of the approximately 5,000 contracts with a strike price of $1,100 will contact the seller to demand immediate delivery of physical gold (about 500,000 total ounces). There are blocks of call options at $5 increments from there, with over 4,000 at $1,125 and more than 9,000 at $1,150. If for some reason the price of gold closed on the COMEX next Friday above $1,150, that would create an instant demand for more than 3 million ounces of physical gold. As the COMEX has barely half that amount of gold among all dealer inventories to cover all open contracts and options, such an event would probably cause the COMEX gold market to experience a huge default. As this would result in a skyrocketing gold price, I have a strong expectation that the US government will work with their trading partners to do everything possible to keep the gold price at or just under $1,100 next Friday.
However, whatever ammunition the US government has to expend to hold down gold prices next week will no longer be available to use afterwards. So, I don’t expect gold to stay near $1,100 for very long. In fact, I expect a significant recovery the very next week.
If, and I consider this a slim prospect, the US government’s tactics fail to hold down the price of gold next week, then I expect gold to take off by the end of next week. Whether it happens next week or later, we are getting very close to the time when I expect gold to reach a new record high (ignoring inflation, of course).
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes "Liberty's Outlook," a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/
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Why are the mines investing billions of dollars in the old mines and looking for new ones.Gold should go up as well as the other metals.
A dealer, whistleblower, on the LME has just revealed inside information about JP Morgan and HSBC’s manipulation to the CFTC hearings, and emailed in real-time to them as it proceeded.. Confirming your info!!
http://www.mineweb.com/mineweb/view/mineweb/en/page72068?oid=101525&sn=Detail&pid=1
And yesterday the goldprice in fact first crashed, then rallied at the middle of the day, as you indicated.
But here it states that the option expiry is on the 26th, while others say it is on the 25th. Details are important here. What is the exact point of time of the expiry? (for instance the next is May 25th, so is it may 25 or may 26, and at what hour of the day?)
Further information to Trand’s inquiry. There are actually two days a month when the options expire, normally on consecutive days. The COMEX options close one day and the OTC options the other. My article referred to the COMEX options which expired on March 26th, and the OTC expired March 25. So, both sources of data were correct, but talking about different markets.
My understanding is that options have to be exercised by the closing of the COMEX market on the expiration day or they become void. They can be exercised sooner, but not later. The COMEX silver market now closes at or close to 1:30 PM Eastern time, though it often takes some time for the reporting services to catch up posting this information. So, it is possible that most people don’t know the COMEX close until 10-20 minutes later. I hope this information helps.
Further information for David Mackenzie. Like other industries, mining operations have suffered difficulties securing financing for the new and expanded operations. Also, many mining companies are reporting soaring marginal cash costs, with several showing that the cost of personell, utilities, and the like up 30% from a year ago levels.
Another factor to consider is that, in the past, a new mine was able to secure financing by pre-selling (hedging) their output for a few years so that they could be assured of selling at a profit above anticipated production costs. Since so many mines have ended up pre-selling their gold at prices far lower that the prevailing price at the time the ore came out of the ground, there is significant pressure from investors on the mines to avoid hedging. If a mine cannot generate capital out of operations or stock sales, it has become more difficult to finance because investors now discount the value of a company if they engage in hedging.
Another factor to consider has to do with environmental issues and the permitting process. In the past it was fairly typical for a mining company to go from discovery to production within three years. Now a 10 year time frame is more typical. This longer time period increases the risk to investors, who are therefore less willing to buy stock for new mining operations.
An additional factor contributing to the delay in developing mines is the shortage of geologists. It is not unusual for a company to have to wait 1-2 years for a geologist to become available to assess a possible mine site. If anyone wants to suggest a career to our youth, geologist might be one way to go. My understanding is that they are now making six-figure incomes and are being offered more work than they can handle.