The Great Gold Caper

The great gold caper *(*A dishonest or illegal activity)

Last week gold opened at $1,004, came in at an all-time high of $1062.70, a low of $1,001.60 and closed out the week at $1048.60. Currently technicals are all showing higher prices. So what exactly is happening in gold? As of today the two main usages for gold, jewelry and industrials, have both dropped, with Q2 jewelry consumption dropping 22% y/y and Q1 industrial demand falling 21% y/y. Q2 gold supply rose 14% y/y to 927 tonnes. Interestingly the Gold Council did come out and say gold demand remained strong in Q2 with demand up 46% y/y. So who is buying all of this gold? Actually, and more importantly, the question that needs to be asked is who is selling gold today in the futures markets? Doing a little research I was surprised to find just how transparent the manipulation is in this market. I am sure if a congressperson had an itch to find out it would be easy for them also, but I would not count on that.

As of March 2009, the official gold reserves looked like this. The Eurozone has 10,856.9 tonnes, the United States has 8,133.5 tonnes, IMF has 3,217.3 tonnes, and the ETF GLD is holding 1,104 tonnes (over 200 tonnes more then a year ago). Imagine being able to affect supply and demand and also playing in futures. Commercials are showing a net short of just over -281,000. See the weekly chart below.

Now for the good part. As of Oct. 1, 2009, all of the ETFs for gold held 1,750 tonnes of gold for private and institutional investors. These ETFs are sold like stocks and come under SEC regulation. The only way these stocks go up is if gold goes up. Now with all of their gold holdings (removing gold from supplies is so rewarding, artificially brings up demand also) what do you think they do in the futures markets? That’s right, they hedge their cash position like a commercial would. They sell! Like last year in oil, what did you forget so soon, someone was selling all the way up to $147 per barrel? Of course oil was helped by the incredible media frenzy in the spring of 2008. Remember all of those articles you read about the earth running out of oil? Then when oil crashed and burned below $40, there were no more articles. With gold I do not think Congress will be jumping in any time soon to blame speculators, like they did last year with oil. I do not think gold really affects Main Street like oil. If I recall correctly, decades ago the Hunt brothers got in some trouble doing a very similar thing. I guess regulations have been lifted. Where are the Hunts now?

What about the dollar? The week of March 17, 2008, the dollar index hit a low of 71.220 and gold that same week came in at $1,033.90. Can you even imagine where gold will go if the dollar hits 71.220 again? Maybe $1,300 or $1,500. And guess who will be selling all the way up?

The numbers below represent the Commercial Net Traders positions taken from the weekly Commitment of Traders (COT) report released by the Commodity Futures Trading Commission each Friday. You will find a 12-month high and low with the past 2 weeks of data.


Commodity 12-mo low 12-mo hi 9-Oct 2-Oct

Gold

-287,610

-69,496

-281,684

-275,234

From: Marketpulse