Short and long term commodity traders tend to go with the flow. If they perceive that a party trading a large position is going in one direction, they tend to pile on and magnify the impact. Such traders never try to fight the trend because it is almost always a losing proposition. Thus, the U.S. government's efforts to suppress the price of gold have been aided by many other traders.
In a huge turn of events, over the past two weeks, the U.S. government's trading partners have lost several skirmishes trying to suppress the spot price of gold.
On Tuesday, May 26, despite repeated significant liquidation, gold closed on the Comex just over $950. Even the near last-minute surprise gold dumping failed as buyers jumped in to buy this "bargain-priced" gold. This resulted in a larger number of Comex gold call options that expired that day to be "in the money" (all contracts with a call price of $950 or less) than would have occurred if the spot price had closed lower. As a result, demand for the immediate delivery of physical gold was higher than otherwise would have happened.
This scenario repeated on Thursday, May 28, the day over-the-counter gold options expired, the gold spot price again closed above $950. Despite steady obvious gold dumping to drive down the price, buyers kept absorbing the new supplies.
On Friday May 29, gold closed in New York at a new all-time high close for the end of a calendar month (ignoring inflation, of course). Buyers had seen the inability to suppress gold prices earlier in the week and took that as a green light for higher gold prices. A new record month-end gold spot price sends a signal to chart-watching technical traders to enter the market, further bolstering demand.
To try to offset some of this positive news for higher gold prices that week, a story started circulating that Congress would vote to approve the 403 metric ton (12.95 million troy ounces) sale of gold by the International Monetary Fund. Any IMF gold sale requires approval by 85 percent of the voting shares, with the US holding just under 17 percent of these shares.
Any discussion of possible IMF gold sales for the past several years, at least since 2002, has been enough to spook the gold market. This time around it didn't seem to affect the market. Congress did not take a vote on the possible IMF gold sale last week, which I think was due to the signs that such a step would not have accomplished the goal of knocking down the gold price.
On Monday, June 1, the CEO of Northwestern Mutual Life Insurance company announced that the company had made a $400 million investment in gold, the first time in the company's 152-year history that it had bought gold for investment. Northwestern is the nation's third largest insurance company. This was just the latest of a recent string of announcements of major gold investments from individuals and companies that normally had never owned gold. Gold and silver largely held their prior week gains.
In Asian markets after the U.S. markets closed on Tuesday, June 2, gold reached as high as $990 and silver touched $16.20. With gold threatening to top $1,000 and silver at risk of exploding upward (at $16.20 it was already up over 41 percent since the start of the year), it was time for the gold suppression efforts to go all out.
Finally, on Wednesday, June 3, the manipulators had some success. The Comex gold price closed at $964.50 and silver at $15.30.
Just when it looked like gold and silver prices might be stymied, buyers once again jumped into the market on Thursday, June 4. At the Comex close, gold settled at $981.25 and silver at $15.88. At that moment, it appeared that the U.S. government's years-long effort to suppress precious metals prices was on the brink of collapse.
That didn't happen.
On Friday, June 5, the Bureau of Labor Statistics (BLS) reported the latest US unemployment statistics for May 2009. The U-3 definition of unemployment, the one most commonly cited, rose to 9.4% while the U-6 unemployment rate rose to 15.9%. Had unemployment rates been computed by the same methodology that the BLS previously used up into the early Clinton administration, the reported unemployment rate would have been more than 20 percent! For the 46th time of the past 48 monthly unemployment reporting dates, the price of gold was clobbered, and in no uncertain terms. The Comex closed with gold at $961.75 and silver at $15.38 that day.
On Saturday, June 6, the three-day St. Petersburg International Economic Forum concluded in Russia. Sponsored by Russia, the conference was attended by officials from China, India, Brazil, and a number of other nations, though the US was specifically excluded. During a panel discussing reserve currencies, John Lipsky, the IMF First Deputy Managing Director, dropped a bombshell when he said that it would be possible to take the "revolutionary" step of creating a new global reserve currency to replace the dollar over time.
The IMF's Special Drawing Rights could be adapted for use as the new currency. Lipsky said, "There are many, many attractions in the long run to such an outcome ... But this is not a quick, short or easy decision."
Such a currency would be issued by an international organization that would be equivalent to a global central bank.
According to the IMF, nearly 70 percent of the world's currency reserves are now held in U.S. dollars. This leaves foreign central banks exposed to weakness in the U.S. economy and likely high inflation. Another speaker at this panel, Ousmene Mandeng, the head of Ashmore Investment Management, Ltd., stated, "The largest debtor is very unlikely to dominate any currency arrangement today."
In New York on Sunday, June 7, Guo Ahuqing, the chairman of China Construction Bank, the world's second largest bank by market value said, "I think the U.S. government and the World Bank can consider the possibility of issuing RMB bonds in the Hong Kong market and the Shanghai market." The reason for this announcement was to encourage the development of Chinese RMB yuan as a major international currency, displacing some of the U.S. dollar's market share.
Any threat to the U.S. dollar as the world's reserve currency would cripple the value of the dollar and lead to higher gold and silver prices, as measured in the dollar. Therefore, it was absolutely essential for the U.S. government to make sure that the price of gold dropped on Monday, June 8, to distract from the impact of the St. Peters burg conference. That is just what happened when the Comex closed at $951.75 and $14.94 for gold and silver, respectively. Even though prices declined, they did not fall as much as the manipulators wanted.
The major battle between the free market and the U.S. government's efforts to suppress gold prices (including manipulation of the silver price as part of the strategy) will rage during the course of this week and maybe beyond. The latest reports of the Commitment of Traders on Comex gold and silver markets show that all of the net increase in "paper gold and silver" that has entered the market recently has been sold by the institutions that already have the largest short positions.
Other traders, on a net basis, have reduced their short and increased their long positions. This blatant distortion of the market cannot be sustained forever. To me, it is a question of when, not if, that the prices of gold and silver will jump far higher than current levels.
Other traders would not commit financial suicide and go up against the U.S. government and its trading partners unless they perceived huge weaknesses in the government's potential to continue to defend that position. Back in 1992, George Soros and Jim Rogers became famous for selling $10 billion short in the British pound. They made a huge profit when the Bank of England was unable to continue to defend the value of the pound.
This time around, I am confident that the U.S. government will eventually fail at suppressing gold and silver prices. Judging by recent actions of other commodity traders, we may not have long to wait.
Other news notes:
Rep. Ron Paul, R-Texas, the 1988 presidential nominee of the Libertarian Party who sought the 2008 Republican presidential nomination, has entered a bill calling for an audit of the Federal Reserve. This bill now has 190 co-sponsors. In response, the Federal Reserve announced last Friday that it intends to hire Linda Robertson as a lobbyist to deal with Congress. Robertson currently is a lobbyist for Johns Hopkins University in Baltimore but previously headed the Washington lobbying office for Enron and was an adviser to all three of President Clinton's Treasury Secretaries Lawrence Summers, Robert Rubin and Lloyd Bentsen.
In the past few weeks, higher gold and silver prices have sparked higher volumes of liquidation and purchases by investors. On balance, demand has far surpassed supply, a trend I expect to continue. On May 29, my company enjoyed it highest sales volume thus far in 2009.
Last week I participated in a telephone meeting of the board of directors of a non-profit organization. One agenda item was the organization's investments. When discussing the possibility of purchasing some gold for a small portion of the portfolio, other directors who are professional money managers were generally comfortable with the idea. However, many of the other directors, who are professionals in other fields, were surprisingly fearful of buying gold.
One man expressed it best when he acknowledged the impressive track record of precious metals over the course of this decade, but was afraid that prices may now fall because "the economy is beginning to recover." I am sure that there are many other investors who feel the same way.
