What’s next for gold? Most surprising to me is the price of gold itself.
I’m not a believer in conspiracy theories, so it’s hard for me to credit that “they” are holding the price of the metal down. “They” (in the past it’s been the Rothschilds, the Bilderbergers, the CFR, the BIS, among many others, possibly including space aliens) are usually an excuse created by the unsophisticated to explain what went wrong with some convoluted theory that didn’t pan out. Certainly none of the theorists have ever met one of “them” in the flesh – nor are they likely to, if only because most seem to live in low rent one-bedroom flats and spend all their time on the Internet. But figures (which are notoriously unreliable) on the gold markets (which are highly opaque) do seem to show that there is a large short position in the metal.
Frank Veneroso, whom I consider a credible analyst, and whose research brought the gold short play into the public eye, has said that annual demand is around 4,000 metric tons, mine and scrap supply around 3,000 metric tons, official sales around 300 metric tons and that the difference of 700 metric tons is gold loans, mainly from central banks.
The numbers vary, depending on who’s crunching them, but the most accurate one is probably new mine production, which was 2,460 metric tons in 1999. It appears that there’s been a deficit of use over production for more than a decade. It does make sense to me that central banks would have been loaning out the metal to bullion dealers for years (at relatively low interest rates) in order to get some current return on the seemingly dormant asset. The bullion dealers (mostly large international banks) would sell the gold into the forward market, capturing a premium. Better yet, the price of the metal was driven down by all the selling, so when it came time to deliver, they’d make even more. It’s been, and will continue to be, a great strategy – as long as there’s a bear market in gold.
The last gold bull market crested in January 1980 at over $800, and it’s been all downhill since then; at the same time, the world’s economy and common stocks (until recently) have been in a truly historic bull market. Since all this has been going on for over 20 years now, a full generation, everyone believes it’s going to go on forever. Even gold miners believe it and most of them have been shorting their production years into the future.
The problem, however, is that all that gold which has been borrowed from vaults has been made into jewelry and such and is owned by millions of individuals. If the lenders of the gold, the central banks, want it back, the bullion dealers and mining companies aren’t going to be in a position to deliver. What appears to be developing, in other words, is a classic short squeeze, but one of gigantic proportions.
The X-factor, however, is that central banks still have maybe 20 percent of all the gold in existence left in their vaults, and if things started getting dicey – say, some New York bank getting in trouble because of its bullion dealing – they could sell a lot to keep its price down. But the short position is going to have to be covered at some point.
I’m super-bullish on gold for lots of reasons (detailed in “Crisis Investing” and “International Speculator,”) that are unrelated to the alleged short position. But it sounds credible to me, and it’s just one more good reason the metal isn’t just going through the roof, it’s going to the moon. I just wish I knew the timing – but I sure wouldn’t want to be short right now.
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