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/