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Why Gold Might Soar Over the Next Four Weeks
By Patrick A. Heller, Market Update
October 28, 2008
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Whether or not you acknowledge past efforts by the U.S. government with other governments, central banks and private trading partners to suppress the gold spot price, events coming to pass in the next four weeks could create overwhelming pressure causing much higher gold prices.
Last Friday, the Taiwan government announced that it had completely liquidated its holdings of Fannie Mae, Freddie Mac and Ginnie Mae bonds. If a long-time ally of the United States is willing to admit that it is bailing out of dollar-denominated debt, will other nations continue to show restraint?
Last Friday and Saturday, leaders from 43 Asian and European nations met in Beijing to discuss the global financial crisis. The United States was specifically excluded from this meeting.
These events are just appetizers on what is coming up in the next few weeks:
- Oct. 28: Comex November gold and silver options expire.
- Oct. 28-29: The Federal Open Market Committee meets to discuss, among other subjects, the possible 0.5 percent reduction in benchmark interest rates.
- Oct. 29: Last trading day for COMEX and Chicago Board of Trade gold and silver futures contracts.
- Nov. 4: The U.S. elections will be held and end the need for politicians seeking re-election to try to look good for the voters.
- Nov. 6: European Central Bank meeting at which one of the subjects will be cutting benchmark interest rates.
- By Nov. 10: Adrian Douglas's Market Force Analysis" indicates that the temporary bear market rally in the value of the U.S. dollar will come to an end.
- Nov. 15: The G-8 summit meeting in New York City will discuss plans to reform the international financial and monetary system. There is a strong likelihood that one of the major topics will be the replacement of the U.S. dollar as the major international currency.
- Nov. 20: December gold options expire. Currently, there are about 70 percent more outstanding call options (which gives the owner the right to buy gold at the contract price) than there are put options (which give the seller the right to sell gold at the contract price). If the price of gold starts to rise to any degree, owners of call options might be able to demand physical gold for their contracts at below-market prices. Thus, any modest rise in gold prices could lead to an extreme supply squeeze and rocketing prices.
Other continuing pressures for higher precious metals prices include:
- The TOCOM, the Tokyo Commodities Exchange, provides daily reports of trading positions for major traders. Goldman Sachs and six other firms had huge short gold positions in early 2006. Goldman Sachs and these others have been continuously reducing their short positions. Late last week, Goldman Sachs TOCOM gold position turned into a net long of 370 contracts. The other large short sellers as a group are in their lowest short position in the past 30 months. These companies now have less incentive to want to hold down gold prices.
- There is a significant effort underway by would-be gold and silver buyers, dismayed by the current high premiums for physical gold and silver to purchase December COMEX contracts and ask for physical delivery of the 100-ounce gold and 1,000-ounce silver ingots. Since the COMEX only has a tiny coverage of physical metal for its outstanding contracts, there is a growing risk that the COMEX gold and silver contracts may default. If this occurs, the COMEX allows contracts to be settled for cash rather than gold or silver. If defaults occur, the spot prices for physical gold and silver will soar instantly.
- AIG, America's largest insurance company and beneficiary of over $100 billion in government liquidity over the past six weeks, is still at great risk of financial collapse. From a high of $63.68 per share within the past year, the stock settled at $1.35 on Oct. 27. AIG is widely regarded as holding the largest number of gold and silver derivatives (especially silver) of any company in the world. If it fails, the counterparties on these derivatives contracts could be forced to quickly acquire large quantities of gold and silver to minimize their financial losses.
It would only take one or a few of these events to get out of control for the prices of gold and silver to explode.
The U.S. government and its partners are pulling as many strings as it can to try to hold down prices. A large number of 400-ounce gold bars have been appearing on the market with markings that indicate that they may either be coming from the U.S. Treasury or International Monetary Fund reserves. The IMF is not yet authorized to sell any gold, but apparently can lease gold without restriction. If it becomes public knowledge that the U.S. or the IMF is sneaking gold onto the market to help hold down prices, the news will actually have the opposite effect because it would represent an admission that the U.S. dollar deserves to be worth much less than it is today
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