As momentum in the gold market turns bullish, many people wonder what has suddenly happened to change things? The simple answer is nothing. The price of gold is simply being set by politics, as has been the case since at least April 12, 2013.
Once you crunched the numbers, it was easy to see that the old prices couldn’t last. In my article, “Did COMEX Just Receive A Physical Gold Bailout From The Feds?”, published in June 2015, I did just that. Gold prices were down to about $1,175 per troy ounce, and I took the trouble to calculate the physical cost of the politics of gold. Comparing new mining supplies + scrap vs. the then-existing demand level, I concluded that some not-so-mysterious gold supplier of last resort had to inject at least 1,345 tons in order to balance supply with demand in 2015.
As it turned out, demand in both India and China went up a lot more than we expected back then, even as supply came in exactly as projected. As a result, the politicians at the US Treasury, in concert with their financial agents on Wall Street, were forced to inject something higher than my figures showed back then. If they hadn’t done so, we would have seen shortages and panic. Since it didn’t happen, in spite of a gap between supply and demand near 1,500 tons, someone supplied the gold. As noted in the same article, the gap between supply and demand in 2014 was about 600 tons. In 2013, there was also a big gap (some 1,200 tons), but it was filled mostly by dishoarding from the shrinking western ETFs.
Since I believe that the only entity with the motive and resources to inject these huge amount of gold into the market is none other than the US government, America’s gold hoard is now down from 8,100 to 6,000 tons of gold. The rest is probably subject to location swap liens and other legal encumbrances owed to other nations like the UK, which may have forwarded the hard physical gold needed in 2014/15 from its vault. It will be expecting that gold back someday.
As explained in June, the financial agent for the US Treasury is almost certainly JP Morgan Chase. They have an overtly disclosed contract to manage the Federal Reserve’s mortgage bond portfolio, and, I believe, a covert contract to manage the Treasury’s gold. So, let’s fast-forward to today, and see what the big shots at JPM have to say. On February 11, 2016, in an oral interview on CNBC, Robert Michele, JP Morgan’s global Chief Investment Officer (NYSE:CIO), showed great emotional frustration. He seemed to throw up his hands, and while doing that, he stated that people “have more confidence in gold than paper money.”
It was a very puzzling statement for someone to make. It was a bizarre emotional reaction on camera, given the fact that gold prices have been plummeting for 4.5 years! I believe that Michele’s comments can only be understood in context. If top people at JPM already know that the deep drop in gold prices was artificially contrived, and that the continuing physical demand is natural and real, his statements and facial expressions make perfect sense.
In short, Mr. Michele is expressing his frustration that JP Morgan Chase was unable to break the back of gold demand, in spite of having been given what I believe was carte blanche to invade the US Gold Reserve by the Obama Administration. Have they thrown away thousands of tons of American-owned gold and accomplished nothing? I believe that they have. That was frustration reflected in what Mr. Michele’s voice, in my view.
Sooner or later, it becomes necessary to slow down the hemorrhage. That means it is now necessary to allow prices to rise somewhat. Money can be made on short term short and long positioning, during the process of gold price normalization, of course. It is not going to happen all at once. It will be a step-wise process. Remember, physical buyers are very price sensitive. When prices go up by $50 – $100 in one shot, they stop buying. That means the price doesn’t have to go up much more than that in order to tamp down demand. The problem is that these sudden bouts of cheapness don’t last long. The hesitancy exhausts itself as they get used to the higher price, and prices must go up another notch.
Over the next year, expect sequential price increases. They will rise in bits and spurts. Up by $35, then down by $20, as price point is tested by both sides, to see how much physical gold gets eaten up. At some point, maybe by the end of 2016, a point where the supply and demand is equalized will be reached. If a new source of physical gold fortuitously appears on the way (like a fire sale by Venezuela?), it will be opportunistically used. But, the physical gold deficit in 2016 would have been over 2,000 tons if gold had stayed beneath $1,200 per ounce. So, even a few hundred tons from Venezuela isn’t going to stop the adjustment process.
The bottom line is that gold prices will now rise because a price must be found that discourages people from buying so much. My best guess is that this will be somewhere near the place when supply and demand last balanced, in late 2012, or somewhere between $1,500 and $1,600 per ounce. That assumes that the sovereign debt crisis doesn’t explode along the way. If it does, the sky is the limit, because the demand will skyrocket beyond already high levels.
In 2017, if our new President is Bernie Sanders and/or Donald Trump, gold will do well. Neither derives large campaign contributions from Wall Street, which means that gold price scams are not going to be an attractive proposition for either of them. Gold can be expected to soar in 2017 under either President even if nothing significant happens. If we have a sovereign debt crisis though, all bets are off. Irrespective of whether or not a full blown crisis occurs, we will almost certainly see the insolvency of a lot of pension plans in the USA by the end of 2017. That is also going to propel gold demand and, therefore, prices.
If Hillary Clinton, the candidate most beholden to the big NYC banks, is the winner, we will see more gaming of the system, with a renewed effort to control prices. But, the USA is fast running out of gold. Clinton cannot change that. How fast prices will rise is and will continue to be a matter of politics. If Hillary is willing to preside over the emptying of America’s entire gold reserve, prices will be slowed down, or may even decline for a while. But, in the end, they will rise as certainly as the sun will rise in the morning.
I hope you’ve enjoyed this article. It’s been a long time and some have been wondering what I’ve been doing? I assure you that I’ve been very productive. For example, I’ve written a new thriller, “BANK – Thrilling Adventures on Wall Street” which you might enjoy reading. It can be pre-ordered from Amazon.com and automatically delivered to you on its release date of April 16, 2016. The novel is fiction, of course, but it was inspired by a set of true facts. Among other things, the novel touches on the process of gold manipulation and reading it will help you more clearly visualize how it is done.