Published: Saturday, January 28, 2006 Bylined to: Bob Chapman
Price of gold may exceed US$800 an ounce if Iran’s nuclear issue heats up
THE INTERNATIONAL FORECASTER editor Bob Chapman writes: J. P. Morgan says the price of gold may exceed US$800 an ounce if Iran’s nuclear issue heats up ... otherwise it is $600 by the end of the year.
Last week the gold net long position was up only 80,000 ounces. Gold rose $12.00 again due to short covering ... the gold ETF only added 7.12 tonnes, which tells us they are short gold.
We keep hearing the same refrain from banks and others connected to the gold cartel, there is not enough depth or liquidity in the gold market for gold to assume a major role in central bank reserve management. Barclays Capital announced this, and they been wrong consistently about gold and silver.
Goldman Sachs continues to be an aggressive short seller on TOCOM. Last Friday they increased shorts 2928 contracts to 35,297. This and their shorting on Comex were used to suppress mining shares. About 500,000 call option contracts on gold-mining shares were due for expiry with 75% in-the-money. They wanted to make sure they expired worthless. There can be no other reason except suppression of share prices, especially with the Iran situation going on and violence in Nigeria.
Venezuelan President Hugo Chavez Frias, Brazil’s President Luis Inacio da Silva and Argentina’s President Nestor Kirchner have announced a trilateral accord for the promotion of regional mining activity and the foundation for the construction of a southern continental MineSur mining project.
They will define the necessary productive networks to facilitate a review of proven mineral reserves across the three countries, which could be the largest in the world. On Tuesday, gold open interest fell 3,720 contracts to 361.125, which bears out our opinion that this is a short coming rally that will last months even years. There is room for more than 100,000 long contracts, so this rally is a long, long way from being over.
Goldman Sachs on Tuesday increased their net short position again on TOCOM by 1760 contracts to be net short 32,642 contracts. The shorts for the major participants are: Sumitmo or Sumitomo -64,396 contracts; Mitsui -58,408; Goldman -32,642 and Mitsubishi -31,419. Out of 77 trading companies seven companies make up 94.2%. If the general US market folds here, which we believe it will, these shorts and those on Comex will be destroyed. We believe that is about to happen. We see gold at $850 soon and then higher.
For the first time since last September the ECB did not sell any gold from its banks’ reserves. We believe the Washington Agreement sellers realize they cannot stop the gold rally so they’ll wait for an overbought spot or weakness at higher prices and aggressively sell, which is to be expected. If $562.50 is broken on the upside, then we are in for an upward run to $610-$620.
Few talk about what central banks are going to do with their hoards of depreciating dollars or for that matter most currencies.
For starters there is only one thing they can easily do with them and that is buy gold. In China’s case they could put away 3,000 tonnes without even skipping a heartbeat.
America is essentially bankrupt.
Why would nations want to accumulate such a worthless fiat currency?
Smart dollar holders have to be gold buyers.
Gold may have gone up $5.20 on Wednesday, but again it wasn’t because of the longs. Open interest fell 5046 contracts to 356,080. The upside again was the result of short covering. The longs are waiting for $5 and $10 drops in gold and then they’ll go long. On the other hand they have to compete with shorts trying to buy as well to cover their shorts. We are guessing, but it could take $700 an ounce to $850 just for the shorts to fully cover.
Again on Wednesday, Goldman Sachs added 142 contracts short, bringing their short TOCOM position to 32,784. On Wednesday, silver opened up $0.20 and never looked back, closing up $0.27 at $9.44. That silver ETF looks like it will become reality and you’ll see silver go up $0.50 and $1.00 a day as the shorts attempt to cover ... this is very explosive.
Eventually the silver ETF will prove to be a Trojan Horse.
There will be the surge on anticipation and initial position taking, but ultimately it will allow massive silver manipulation. That is because it can be used as security to sell futures contracts at a ratio of 100 paper ounces per ounce held in the ETF. Pushing silver prices down under those circumstances would be a pushover. It will also deflect demand away from physical buying as well as share buying. In the ETF you are not buying silver, you are buying a derivative.
Peter Munk, Chairman of Barrick Gold said, “The market price of gold was being driven by investors rather than end user demand, which was growing steadily rather than spectacularly in spite of the rise of China and India. Traditional investors were looking to gold as an asset and store of value, while hedge funds were reinforcing the trend by throwing their weight behind its upward momentum."
"At the time of the Iraq War the gold price spiked. But, now there is a more pervasive sense of insecurity. Iran has got to be the issue. Investors no longer had full confidence in US dollar assets, a traditional safe haven in uncertain times."
"Many people want some security against a possible collapse of the dollar. But, the euro, he said, had its own problems. Hence, the interest in gold. Gold is a wonderful substitute for cash, he said, adding it is the one currency that cannot be debased.”
He said he had strong indications that some Middle Eastern investors were buying gold, in part due to political risks. User demand is growing 5-10% a year.
His interview was very upbeat on gold. Our question is, why he isn’t closing his hedges that are losing more than $5 billion at the moment?
The Securities & Exchange Board of India will allow mutual funds to launch gold-exchange traded funds similar to a mutual fund unit. It would be held mostly in dematerialized form, that to US means derivatives. An investor would get a securities certificate defining the ownership of a particular amount of gold. If this system is what we think it is it will quickly be used to suppress the gold price by not buying physical just buying derivative contracts.
On Thursday, gold closed off $3.40. The longs rose 5,276 contracts to 361,359. Silver contracts only rose 945 contracts Tuesday and 821 on Wednesday. Open interest is 132,103. This tells us like with gold the silver market is being driven by short covering as well.
China will be shut down for a week to mark the lunar New Year. Throughout Asia gold is being bought by jewelers on dips, although there is gold bar selling from Indonesia and Thailand. Italian jewelry exports to the UAE were up 27.1% by value in the first nine months of the year. Russian tourists have been big buyers. The GLD ETF bought 18.58 tons of gold, the fourth largest buy ever.
The number 4 world gold miner, Gold Fields, will start construction at its Cerro Corona gold and copper project in northern Peru in February. They have an 80.7% interest in the permitted projected. CEO Ian Cockerill is happy to have a foothold in Peru with the Peru mining group Buenaventura and has got great Confidence in the country’s future. They look to expand in Peru and in Venezuela as well.
Lo and behold, European central banks are unlikely to sell the total of 2,500 tonnes of gold permitted under the 5-year central bank gold agreement. Total confirmed and probable sales stand at 1,441 tonnes, of which 599 tonnes has already taken place and a further 842 tonnes are expected to take place over the balance of the agreement. Included are 130 tonnes of Swiss sales, which completes their long-term disposal program, and the 600 tonnes of French sales, of which 151 tonnes has already been completed, and the Dutch sale of 165 tonnes, of which 75 tonnes have been sold.
They’ll be Portuguese sales of 160 tonnes, of which 65 tonnes have been completed, Austrian sales of 90 tonnes, of which 15 tonnes are already done, and Swedish sales of 60 tonnes, 17 of which have been done.
The ECB sales of 47 tonnes undertaken so far and 6 tonnes have been sold by the Bundesbank in the form of coins. These sales are 1,441 tonnes, or just over half the potential sales. The Bundesbank could sell 594 tonnes of a 600-tonne allocation, but we doubt that. Unless the ECB sells the maximum, sales won’t be met.
The shorts desperately need the Central Bank sales plus their secret leasing. The production deficit to demand is 1,500 to 2,000 tonnes annually. Any cutback in these sales will send gold soaring.
On Friday, gold open interest fell, yes fell, 9,987 contracts to 351,369. The specs are still not on the long side so 100,000 to 150,000 long contracts could be added without the market getting over bought. The great short covering games is on ... this is as good as it gets.
We watched the CNBC George Soros interview ... he said consumer spending would slow sharply as the housing market falls. The consumer will no longer be able to spend more than he earns. A slow 2006 and a slower 2007 will affect the whole world economy. Everyone at the World Economic Forum was bullish except George and Stephen Roach of Morgan Stanley. George intimated he was short the markets and long gold. His final comment was it is a bit like dancing on the Titanic.
On Thursday and Friday, silver lease rates have tripled in the one-month term and spiked to somewhat lesser peaks in other terms, but all terms are up 50%. The bottom line is the cartel is trying to suppress silver.
Russia’s gold output fell to 168.03 tons, down 3.5% from 2004 in 2005.
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