Last week saw major fireworks in the gold market. In three days, gold fell $24, from a Tuesday spot of $685 to a Friday spot of $661. Who were the sellers? Dan Norcini, writing for Jim Sinclair’s MineSet, has proclaimed the sellers to be the usual suspects: the gold bullion banks.
Here’s how Norcini analyzes the action:
“. . . the INCREASE in the new shorts came from the commercial category, which by and large are dominated by the bullion banks. That group alone added a whopping 29,327 new short positions. Folks – this is the LARGEST WEEKLY INCREASE IN THE NUMBER OF NEW SHORTS IN ONE WEEK’S TIME since June 2005!
“In other words, this same group, which was determined to hold the gold price under $450 two years ago and threw everything but the kitchen sink at it back then, apparently felt the need to ensure that the gold price did not reach the magical $700 level this past week. Even last year’s surge in May which saw the price of gold blast through the $730 level did not engender the amount of new selling by the bullion banks and their friends. Clearly someone is extremely concerned about a rising gold price given the current economic environment and the implications that such a price rise would raise.”
Precious metals investors seeking protection against a declining dollar should find such analysis fascinating, or at least intriguing, but not compelling. While the entities wanting to knock down the price of gold are powerful, they are not all-powerful and do not control the metals markets. If they had control, gold would still be below $300 and silver below $5.
Yet we must pay the bullion banks their dues. At times, they can and do have big impacts on gold and silver prices. And, they come to the game with very deep pockets.
Last week was a good example. At $670 gold (picking a midrange figure), the added 29,327 contracts put nearly $2 billion into play. Because the bullion banks entered the market on the short side, their risks are potentially more than $2 billion. If they had gone long, their risks would be limited to the number of ounces times the buy price.
Because the bullion banks went short, their potential losses, at least theoretically, are unlimited. If gold goes to $2,000 and they do not cover, their losses would be about $3.9 billion, the difference between the price at which they went short ($670 in this example) and $2,000.
Keep in mind that the 29,327 contracts were added to the net short position already held by the bullion banks. The bullion banks are in the game really big. Which causes me to ask: are they in it for profits, or are they there for political reasons?
Political reasons? Yes, political reasons: to keep the dollar from falling through the important 80 level on the US$ Index, which would be major disaster for the Bush administration. Assuming political reasons, one has to ask: are the bullion banks so patriotic that they are willing to risk billions of dollars to keep the dollar above 80? Absolutely not.
So, for profits or for political reasons? Probably both.
Do the bullion banks take orders from the Plunge Protection Team, which attempts to keep the price of gold under control? Note under control is a long way from having control.
The PPT and the bullion banks lost control of the gold market when gold pushed above $300 in 2001. Now, via gold short positions backed by their balance sheets, are the bullion banks trying to keep gold from plowing through $700 and taking out the highs of May 2006? Such a move could be devastating for the dollar, perhaps being the catalyst that causes the dollar to break through 79 on the US$ Index and spiral downward. (See my July 9 blog post about other suspected PPT efforts)
I further suspect the bullion banks’ positions in the gold market are guaranteed by the US Treasury. Why else would they take such huge risks when nearly every analyst outside the bullion banks sees huge upside potential in gold? In fact, if the bullion banks and European central banks were not regular sellers of gold, it would already be triple digits.