Gold Just Messing with Bankers’ Heads

Gold hasn’t made much headway since the beginning of the month, when COMEX futures surged $50 in the space of two days. With the dollar suffering from the vapors, there’s no compelling reason why the December contract should have loitered near $1000 ever since.  Granted, that’s a nice, round number, and it probably works smoothly with put-and-call hedges that allow bullion dealers to borrow as much of the stuff as they’d care to without risk. It is the same thing we see on expiration Fridays in the equity options market. When a stock gets “pegged” to a strike price, it’s possible for even small players to transactquantities of stock with notional values in the millions or even tens of millions of dollars. Their tactics go by such names as conversions, reversals, jelly rolls and buy/writes, and they usually yield relatively small profits over short periods of time, albeit with nearly zero risk.

Central-banks-should-be-worried-small2

That’s about the only reason we can think of for gold to have turned flaccid at $1000:  It is a price that is beautifully suited to arbitrage.  Although this may have caused gold futures to flatline on the intraday charts (see above),  it has set traders’ otherwise stony hearts palpitating with anxiety:  over Barrick’s decision to cover its short hedges; over the G-20 meeting in Pittsburgh at the end of this month; and over the latest Commitment of Traders report, which showed the smart money to be betting the “Don’t” line heavily. In fact, relative to open interest in gold contracts, Big Four traders are long 18.5% versus short 28.9%. The figures are even more bearish in Silver, where the big commercials are short more than four contracts for every one they are long.  Are these guys ever wrong? someone asked in the Rick’s Picks chat room yesterday. Occasionally. But you don’t want to make a habit of fading them whenever they line up against something you happen to like.

We’ll Take Our Chances

For the moment, though, we’ll take our chances, since we’ve been expecting December Gold to push up to at least $1074 before bulls conceivably have something to worry about. But at $1000? Gold is toying with the Powers That Be, not the other way around. It is messing with the Fed, messing with the central banks, and messing with G-20. They can gang up on bullion and pound it down by $50 to $100 whenever they feel like it, as we well know. But so what? That might have seemed impressive six or seven years ago, when gold was just beginning to rise off a floor near $300. But if these guys are really omnipotent, why has the price of gold more than tripled since?

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

  • ricecake September 15, 2009, 11:33 pm

    What about silver? Chinese government is famous for the “People’s War”. Now It encourage the Chinese people to buy Gold and Silver. Just image 1/3 of the 1.3 billion do that. Gold is too expensive right now. But they can buy silver. What will be the price of silver?

  • ben September 15, 2009, 10:41 pm

    You can’t manipulate anything from one side of the market. You must be both a buyer and a seller to be a real manipulator. Governments that want to keep the gold price down can’t do it indefinitely by dumping gold onto the market. They will eventually run out…ands then what?

  • Alok Mittal September 15, 2009, 1:12 pm

    Slowly but surely, China is accumulating gold. But the going is far too slow to be of any significant use. “Any significant use to whom, and for what ?”, you may ask. The answer is simple : China is looking to replace the US Dollar as the reserve currency of the World. It is looking to create a new currency based on the Yuan, Gold, maybe the SDR, and other unknown constituents. For this it needs huge gold reserves. Currently China has about 1000 tons of the precious metal which is hardly enough – it needs 5 to 10 times this amount. And being the largest producer of the yellow metal for two years in a row is just not enough. The recent talks regarding sale of the IMF gold stock of some 3200 tons was music to Chinese ears. A few weeks ago china offered to buy out the entire IMF gold stock – the resulting shock waves which reverberated throughout the Pentagon were very similar to those we see in Sci-fi movies. The writing was on the wall – they didn’t need to hold brainstorming sessions to find out why china had made the offer. Since then the sale has been put on the back-burner and china continues to purchase much, much smaller quantities from other sources. Now, assuming their purchase had gone through, China may have paid for that gold with US T-Bonds (having 1.3 trillion dollars or so of the same), OR, they may have paid for it in Yuan, with a view to putting a significantly large amount of their home currency into the international market in a single stroke. Their recent purchase of USD 50 Billion worth of IMF Bonds, denominated in SDR and paid for in Yuan, was the first step towards this objective, and, I believe, also contributed to the jump in the gold price which took place at the same time. This may also have helped Barrick take a decision to cover shorts. Barrick’s short covering will ensure that Gold reaches the immediate target given by Rick’s Picks of 1074. In fact, the second target of around USD 1150 is likely to be achieved in the next couple of months. Talk about the Chinese Triple Effect !

  • Rich September 15, 2009, 1:10 pm

    Nice prose Rick.
    Way too many golden calves for us here.
    Smackdown between China and USA may not end well.
    Like a broken record, we like SDS above 41.05, SRS above 10.15, SKF above 25.97, QID above 23.72, SMN above 11.09 and TWM above 29.15 here.
    Profitable Regards All…
    http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3251493

  • Aaron September 15, 2009, 6:48 am

    By the way, whatever happened to all the gold in the basement vaults of the world trade centers? Where is it now? Was that not the US Treasury’s? Maybe someone here might know someone who knows.

  • Socrates September 15, 2009, 5:44 am

    Gold is going to $800 in 2010. This upward move may stop between 1033 and 1022 or spike up toyour number of 1074.

    The downtrend in gold will start when the ES, YM, TF etc make their highs come October 4/5 or 9 or 2nd week in October 09.

    ES high 1114.75. YM at 10336. Gold will go down with the indices and the US dollar will rally to 82-85/88 ( US index). The dollar will hit a final low..all time low in 2012. I know the number… and revist this number 2 more in 2013 and 2014. Then it takes off.

    Deflation first in 2010/2011 then inflation parabolic after to 2014/15. Gold will take off in 2011 slowly then parabolic till 2014. The number….hey you got to do your own work.

    “There is nothing new under the sun.” What was then will be now and what is now will be in the future.”

    Remember your government ( congress and all ) has been lying to you for a very long time from Reagan days and probably before. If you remember this you become a better trader. Democrats/ Republicans…they are the same crooks…they just get your mind messed up thinking they are different…one has religion as the mantra the other as choice..both BS. One pair of shoes…one left one right…no different.

    Obummer is surrounded by Goldman cronies……that says it all.

    Bank of Canada governor is a Goldman crony…Mark Carney. They have this all fixed.

    ES 420-380…here I come…..YM 4,200-3800 here I am….

    Marx is alive and well in America…he was know as Geogre W. Bush and now Obummer.

  • FranSix September 15, 2009, 5:03 am

    I would consider that the price control aspect as in the central bank’s interest, and the front-running of any central bank gold sales are in the commercial banking sector’s interest.

    But it’s more about the control of assets, namely, controlling the risk. If you have a risk free asset, then there is not much value in controlling the risk. But you can create value in risk management obligations, starting with increasing measurable risk and coaxing the hoarded gold out of government’s hands.

    You need to create network of risk control assets in a derivative scheme to provide liquidity to the commercial banking sector. And using a risk free asset like gold would require vending the public trust in order to effect a price change of any magnitude. So if central banks don’t agree to lease their gold, then of course they are hamstrung by a banker’s strike in sovereign debt (this is sort of what is happening now, from the perspective of gold sales). Normally you would be trading prices in leased gold, and as long as you can prevent people from taking delivery, then you have some scope of action.

    The buildup of swaps held against the risk free asset, and the subsequent interest rates that are generated from leases and margin, will then provide a network of up to 10000X leverage where a roomful of pallets of gold at the bottom of an inverted pyramid liquidity scheme and a massive bubble of liquidity extending out to the top or the base.

    Short term gold leases are chronically in negative interest rates, so governments are literally paying to have their gold leased out. This is where the central bankers get the notion of charging negative interest on the overnight rate.

    This is my guess on the mechanics of how the control of central bank bullion is brought into the commercial banking sector through risk management.

    That gold is pawned before you know it.

  • ricecake September 15, 2009, 3:27 am

    Why? May be it’s out of their power to control and manipulate the Gold price? Because the demand is so high that whenever the dump the Gold for sale, enough people there to absorb it all? They don’t have enough Gold in their holding?