The Naked Shorts on Gold

Posted: May 19, 2013 12:01 AM

Earlier this year, the financial world was shocked when Germany asked for the return of its gold.  The request came within 3 months of the Feds refusal to submit to an audit of its gold reserves by Germany’s Bundesbank.  The request itself was unusual in that Germany only asked for 50% of its gold to be returned by year 2020.

Why even ask for your gold back now if you don’t want it for 7 years?  You either want your physical gold or you don’t.  You can either have it or you can’t.  It’s not hard to come to the conclusion that Germany did not ask for their gold now because they believe they couldn’t get it.  And if they believe they couldn’t get it, I find it hard to believe it is for any other reason than they believe it is not there.

Since Germany refused to open that Pandora’s box, and force the return or a public statement as to why that can’t happen, that leaves the door wide open for explanation.  Imagine, breaking news that our Fed did not have the gold reserves that appear on the books.  That news alone could crash the dollar and send gold prices through the roof.

The ramifications for every foreign and domestic investor, who holds dollar backed assets, could be catapocalismic.  Yes, such an event would require the creation of a new word as no other word yet spoken, throughout history, could describe the fallout of such an event.  It would make what happened in Cyprus appear as insignificant as a fit thrown by the Cookie Monster when denied a cookie.

This considered, some gold analysts believe the Fed was caught red-handed – without the goods – thus putting the Fed in a position whereby it has to, get the goods.  The speculation begins.

The recent drop in gold prices has been attributed to massive short-selling.  Naked short selling to be more specific.  That is where the investor sells gold they don’t have, at today’s price, with the promise to deliver at some time in the future.  The plan works if you can actually buy the gold you have promised to deliver, at a cheaper price than what you were already paid.  For example:  You sell it at $1700 and hope to have a chance to buy it for $1500 before it’s time to deliver.

This typifies the paper gold market. No gold is required to make these kinds of trades.  However, it is this market, (the futures market) that plays a key role in establishing the spot price of both paper and physical gold.  In this case, massive short selling sends a signal that gold prices are going to fall.  And, so they did.  Is it coincidence the Fed may need gold at the same time prices fell so dramatically?

Enter the “M” word into conversations about the recent price collapse of gold.  In theory, if you have enough money to gamble on prices going down, you can “manipulate” the entire gold market.  To me, manipulation though, is over-rated and often short-lived.  Case-in-point… If you have illegal access to the Associated Press’ Twitter account you can manipulate a market.  But, it wasn’t long and the truth prevailed.

Even Warren Buffett manipulates a market by announcing Berkshire Hathaway has taken a new stake in another company.  Ever heard him announce he was about to?  For awhile, the company in which the stake was taken may see a run on its stock price but eventually earnings take over.  For awhile, Berkshire Stock may rise, but eventually, truth prevails.  Were it not so, Berkshire stock would never go down.

So it is with the precious metals’ markets.  In the end, it’s supply and demand of physical gold that will determine the price.  At some point, (Germany could have been the trigger) the truth explodes onto the scene.

For the moment, let’s go with the thought that the Fed needs gold and it needs it at a low price.  The plan only works if you succeed in scaring those who currently own physical gold into selling it.  You can rub paper together all day long and never produce a gold coin.  Like in the game, rock scissor, paper.  When paper covers paper you get nothing!

So, if we believe the recent price drop was due to manipulation… by someone… is it working?  Or, will the truth again prevail?  As I write, and I have spoken about this long before it hit the news, the U.S. mint has announced it has run out of certain gold coins.  For the third time this year it is also out of certain silver coins.  Reports are everywhere, physical demand is skyrocketing.

Sorry Bundesbank!  The people have spoken.  We are not only keeping our physical gold, we are buying more.  Which brings us back to the plan – if indeed a plan at all – to acquire physical gold at a cheap price.  If no one is selling, how does the paper trade produce enough gold to make good on demands for delivery of physical gold?

In the end, the only way to make good is to buy the physical gold.  And that feat is only getting harder and harder to accomplish as more and more gold is being bought by Central Banks, Governments and average investors.

It is my opinion that the harvest has met drought.  But, that is only my opinion.  Do not confuse that with an attempt to manipulate the entire world market in gold.