Last week's essay dealt with the fact that the inverse link between the dollar and the gold price that was in place for a long time no longer appears to work. Previously, whenever the dollar rallied, one could be pretty sure that sooner or later - more often sooner - the gold price would decline. And vice versa.
During the dollar rally of past few weeks, though, the gold price has held up very well indeed; at first bumping against the $360 level until it managed to break higher and settle in the low $360's. There were quite a number of obvious 'raids' on gold during this time, when heavy selling on Comex pushed the price back below $360, yet these dips did not hold - gold stayed subdued for a few hours to a day at most - before it moved back above the psychological $360 level.
During this time resistance at $365 was only breached for brief moments - every move above this level soon reversed to sink back towards $360.
Some time ago, an essay dealt with the possibility that the gold in the vaults of the central banks had to be running low. It was triggered by the knowledge, which was picked up from the www.goldensextant.com website, that much of the US gold hoard is melted down coins from the 1930's confiscation of private gold by Roosevelt. This gold cannot easily come onto the market as it has to be refined first - a process of some magnitude that would attract attention considered to be unwelcome by the authorities.
Given the various estimates of 12 000 to 17 000 tons of gold already leased and swapped from the vaults and the fact that some of what remains cannot come onto the market, it was possible to estimate that perhaps only a few thousand tons remained. Assuming that some central banks would be loathe to let the last of their gold go, as well as speculation that some or even all of the remaining gold may be encumbered under call options written by the central banks - as happened to the gold recently sold by Portugal - there is a case to be made for suspicion that the central bank ducks have laid the last of their gold eggs and that the nest is now empty.
The more evidence of this possibility accumulated, the more the noses of the financial predators who smell a killing to be made begin to twitch. The law of the survival of the fittest applies just as much to the financial wilderness as the one that consists of trees and grassland. Whenever some animal becomes old and ill or otherwise vulnerable, the hyena and the jackal will circle closer to wait for the right time to pounce. The same is true of the financial world.
Gold's sudden move higher on Wednesday - when it moved sharply from below $365 to above $370, something that has been very rare in recent years - might have been just such a pounce. It is rumoured that the sudden move has much to do with the expiry of OTC options in London. If so, there is a good reason for the timing. Consider the status of sellers of call options who approach the expiry with equanimity because the gold price has been hovering well below the $370 and even the $365 strike prices for some time, with little lasting success whenever the price tried to move higher.
Hedging of the options could be reduced as time ran out and it seemed that within a few hours a good profit could be pocketed. Then, suddenly, the gold price jumped to above $370 and refused to go back down. There comes a time when the options again have to be hedged, in full, since expiry is at hand and the options are bound to be exercised. When the sellers of the options start hedging again, the risk of a sell-off is greatly reduced and it becomes more likely that the gold price will maintain its new level - which it did after a brief decline to below $370 during Asian trade on Friday morning - or even increase over the following days as new short positions are covered.
What has happened is bad enough for the people who had sold the OTC options. Their anticipated profits are at risk, if not already evaporated. But also think of all the other people who are still short of gold - physically, on the futures market and in options of all kinds. What has happened since Wednesday shows that their long-held grip on the gold market is slipping. They have to be aware that the predators are out there, circling, their numbers being reinforced every day as the wind carries notice of what is happening.
The short sellers know it is a matter of time, now. However, they can surely be expected to plan some final effort to shake off the impending end; perhaps, this time, if they throw in everything they have in that effort, a miracle could happen. At worst they buy more time to continue to survive; at best they might avoid the final crisis.
But the odds are against them. If they cannot even rally some significant effort soon, it would mean that gold is on the verge of a monster move, to well above $400.
The next few weeks are going to be both critical and fascinating and, on the available evidence, it just might require only a few days to settle the matter.
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