Traders have a saying -- “Opportunity moves to size” -- and we may get to see it play out in the form of a dramatic showdown in the gold market if the IMF receives a go-ahead from the U.S. to sell 400 tonnes of bullion from its inventory.  The prospect surfaced yesterday when it was revealed that the Treasury Department apparently has been lobbying Congress to approve the sale, proposed last May by the IMF to cover a widening income shortfall.  At a current price of around $939 an ounce, the auction would raise a little more than $12 billion.

That may sound like a lot of money, but in comparison to, say, the quarterly losses that any number of large banks have reported recently, it would be barely enough to shore up the books of even one of them for more than a few months. But those 400 metric tons of gold would look microscopically small in comparison to pent-up demand for bullion from the very largest buyers, most particularly sovereign governments that hold sizable dollar reserves and who presumably are eager to hedge them against further erosion in value.

Billions vs. Trillions

As a practical matter, there has not been enough gold for sale to mitigate the kind of exposure we are talking about, since the foreign-currency reserves held by China, Japan and Europe alone total near $3 trillion. But even that number could prove to be small in comparison to the demand for gold from individual investors, most of whom are undoubtedly more nervous about the erosion of paper money’s worth than the nations that print it. So with such huge potential demand, why on earth did investors dump gold yesterday, causing it to fall $16 in mere minutes when word of Treasury’s support for an IMF bullion hit the tape?  Considering the facts noted above, there can only be one answer: Because the yo-yos are too stupid to do the math.

Which brings us to the prospect of opportunity moving to size.  Traders know that when an exceptionally large block of stock is offered for sale, it has a way of coaxing forth demand that might not otherwise have shown itself. The demand can come from  hedgers or arbitrageurs, from long-term investors or short-term traders. In this case, it is likely to come from a buyer, or buyers, so big that they would not risk moving aggressively unless there were a big enough offer to allow them to do so without roiling the markets.  And that is what we predict will happen the next time a large quantity of gold is offered for sale by the IMF:  piranha-like buyers will pick it clean so fast that the bankers, disdaining gold as they evidently do, are going to regret not having offered a thousand tonnes instead.  For gold bugs, that will be remembered as the day hard-money advocates finally called the bankers’ bluff. 

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Seats Going Fast

The 12 seats I’d allotted for the March 8-9 Hidden Pivot seminar are beginning to fill up.  If you’d like to attend this online event, click here  for further details and instructions on how to register. The class will be held on Saturday/Sunday from 9:00 a.m. to 12:30 p.m. Mountain Time.  If you want to learn how to forecast stocks and commodities as confidently and precisely as top pros, this is an opportunity you should not pass up.