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Gold Bugs, Don't Dig In Too Deep

by: Philip Davis August 22, 2006 | about stocks: GLD / IAU    
Philip Davis

Philip Davis

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I was doing a little research and came across this little tidbit:

Central Banks hold 32,000 tons of gold in reserve; this is little changed since the 1980s.

Usually, they have policies regarding what percentage of their currency float is held in gold.

Global gold production is about 2,500 tons per year.

The gold held by central banks is worth double the 20 year average.

If Central Banks decide to lighten up on gold by just 10%, it will flood the market with an 18 month supply. There are currently strict limits on the selling of gold by major CBs to maintain price stability.

With one month left on this year's agreement there are 160 tons that can still be sold by the 15 participating banks (others have no limits) with another 500 tons available to sell under the agreement on September 26th.

Combine central bank selling with the lowest demand levels in 2 years and we may be heading into a collapse!

If you doubt that the CBs are motivated to crush commodity pricing, read this.

Just a note to all you gold bugs out there not to get in too deep, let the Middle East play out for a few days and then let's see if we can hold the 50 dma at $620, but I think we are in for a big letdown if war doesn't break out in Iran this week.

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This article has 9 comments:

  •  
    Aug 22 09:55 AM
    "If Central Banks decide to lighten up on gold by just 10%," Have they said they would? The goldbugs seem to be thinking that Central Bank sales will increase....
    Reply
  •  
    Aug 22 06:25 PM
    Hello Phil,

    What happens this fall when people realize that employment is falling and their companies are now placing pauses on open positions? I'd suspect the dollar will drop and the FED will freeze in the face of unemployment. Ask yourself if it hasn’t already begun..

    Do you realize what gold’s seasonality chart looks like over the last thirty years? If you don’t, check here www.seasonal-charts.co.../

    I look forward to your bearish call on gold as I am short gold stocks, but must admit I am somewhat nervous.

    Great blog, keep up the great work.
    Reply
  •  
    Aug 23 01:15 PM
    Phil--

    You're participating in a market manipultion scheme. You've seen the scheme, and joined in, because you didn't realize it was a scheme in the first place.

    1. The central banks have not been holding onto their gold for the last 20 years. They have been dumping it for the last 20 years, which is why we have had a bear market in gold.
    2. The agreement that's expiring isn't to limit gold sales, its to maximize gold sales. It sets gold sales quotas. Calling it a "strict limit" is to really misunderstand its purpose. The gold sale agreements purpose is to depress the price of gold.
    3. The "Gold" in their vaults, for the most part, is paper. Go look at any annual report for a branch of the US Federal Reserve and look at their assets. They will list no gold, or a tiny amount, but they will list a lot of "Gold Certificates". Paper is not gold.
    4. China, India, Iran, Saudi Arabia, UAE, Pakistan, Malaysia, Vietnam, South Korea, and Russia all have central banks that have announced their intention to *increase* their gold holdings, and significantly in most cases.
    5. There is no question that western central banks have been manipulating the gold price for the last 20 years. The bull market we're seeing now is due to them running out of gold to dump on the market. The Middle Eastern and Eastern central banks are buyers of gold, and they have made signfiicnat commitments to get out of the dollar.

    But even if you're right, as Warren Buffett says "IF you're going to be buying hamburgers, do you want the price to go down or to go up?" As a buyer, I'm happy if the price price goes down.

    Further, think about why they would want to dump gold, and what that means. If they dump gold then it confirms the gold manipulation story (as if it needed it, but you seem to be a skeptic) and confirms the fact that the primary fiat currency of the world-- the US Dollar- is in trouble.

    Is gold really something you want to be short on when the dollar is heading for collapse?
    Reply
  •  
    Aug 25 04:25 AM
    Also, its worth noting that it is well documented that central banks participate in a gold price manipulation scheme whereby they shot gold on the commodity markets.

    There is more gold currently short than there is actual gold above ground!

    Recently the nickel exchange went into default when a similar situation got too extreme:
    news.silverseek.com/Te...

    The idea that central banks can dump gold on the market is laughable-- the idea that they have the same amount of gold in vaults now as they did 20 years ago is absurd. These agreements you mention came about to ensure that they dumped sufficient gold on the market.


    We're in a gold bull market for two reasons-- First, they have run out of gold to dump suppress the price, and second the recognition of the decline in the dollar is gaining ground.

    I'm no fool, I'll be a buyer of gold and gold related assets until I run out of dollars. Gold supply increases slowly with mine production, dollars are being printed like crazy and half to be printed even faster as the US runs deficits of every kind.
    Reply
  •  
    Aug 28 12:03 AM
    Of Interest, draw your own conclusions but I'm seeing about 18,000 tons accounted for in 2 us vaults alone:

    64.233.161.104/search?...;hl=en&gl=us&a...

    www.ny.frb.org/educati...
    Reply
  •  
    Aug 28 01:55 PM
    All of the developing and resource critical central banks have announced their intentions to increase gold supplies.

    Sure western central banks will likely dump the last of their gold at some point (by the way, notice that all the pictures of the gold vault in the kids museum brochure you cited are from the 1980s?) The fact that you can't come up with a citation of how much gold is there to defend your position should be a clue to you-- why is it that fort knox has never been audited?

    And why are you citing forieng owned gold as assets the US can use to prop up the currency? You're building in a gold confiscation into your assumptions without accounting for any other effects of it? (Who do you think owns the gold in the federal reserve depository in New York? Not the NY Federal Reserve, Federal Reserve gold, if any, is in Fort Knox. That vault is the US bullion depository for foreign entities and private US entities.)

    The nickel exchange just went into default. The gold exchange is in a far more leveraged position as central banks short gold.

    Why do you think they will be able to manipulate the market indefinately?
    Reply
  •  
    Aug 28 06:22 PM
    Market manipulation (GATA) simply misses the point of gold (unless you are a party to the lawsuit). OPEC is a market manipulator--do you seriously think OPEC was behind the rise in oil prices over the last few years? Likewise with AU. At best, market manipulation affects the price of gold by a few percentage points. The bigger story is the collapse of the dollar, the specter of inflation, easy money and the like. Also industrial metals have seen nearly the same if not greater increases than gold.
    Reply
  •  
    Aug 29 03:17 AM
    Please read the GATA research you refer to- the manipulation has not been to keep the price of gold high, but to keep it low. The oil market is 12,000 times larger than the gold market (or was it just 1,000?) Thus gold is easier to manipulate. The Market Manipulation story IS the collapse of the dollar story IS the inflation story IS the easy money story.

    Industrial metals are having a bull market because of supply and demand. Gold is having a bull market because of supply and demand, but not as much of one because gold is manipulated.

    The question is, how long can people keep shorting gold they don't have before they are forced to account for their position? If they were forced to do so today, many of the nations largest banks would be insolvent.

    Together they are short more gold than exists in the world.
    Reply
  •  
    Sep 17 08:04 AM
    Here's a little of that Central Bank selling I warned about:

    www.thestreet.com/_yah...
    Reply
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