Friday, October 12, 2012

Titanic War in Gold Between East & West

As gold moves mostly sideways since the announcement of QEternity its worthy to note there is a titanic struggle in the gold markets between central banks of the West who want to keep gold prices down to hide the negative effects of unlimited printing and Eastern (mostly China) central banks that are using the artificially low prices to acquire huge amounts of gold to diversify their currency reserves and hedge their US dollar and Euro positions in government bonds. There's no way to know how long this struggle continues or which way gold might break in the short term but one thing is for sure: Western central banks must supply the gold that Eastern central banks are taking delivery of. Paper derivatives are not going to satisfy the Chinese. They know the game. So how much gold will Western central banks give up to preserve the current price? Who knows, but I'm sure this won't end well for those of us in the Western hemisphere. John Embry has more:

Today John Embry told King World News, “We are literally witnessing a war between the physical buyers (Eastern central banks), and the paper manipulators (commercials or bullion banks), and that is why there is such a fierce battle being waged in gold between $1,735 and $1,800.”  Embry also stated, If the commercials run into trouble (with their massive short positions), KWN readers will see a move in gold that will leave them breathless.
“The commercials are massively short gold at the moment, and each time they try attempt to drive the price of gold lower, there is a solid wall of physical buying they are running into.  I just don’t think they anticipated this.  Meanwhile, the Eastern buyers, such as China, are delighted the commercials keep trying to push gold lower.

But now we are getting to the point where there is a distinct possibility that the bullion banks may run into some serious trouble with their enormous short positions....
“If the commercials run into trouble (with their massive short positions), KWN readers will see a move in gold that will leave them breathless.  But you have to remember that this is a rare event, and it hasn’t happened yet.

When you look at what the IMF just stated about European banks having to deleverage $4.5 trillion of assets, who is going to buy that?  It will be the ECB, and they will have to print money to accomplish that.  The IMF has raised this $4.5 trillion figure once already, and you can be sure the final number will be even higher than what they are stating now.

This means there will be enormous money printing going forward.  People in Europe can’t even begin to imagine the scale we are talking about.  The ECB will do this printing in stages, in order to decrease the shock on the populace.  There are too many people in the North, particularly in Germany, that are worried about a currency collapse.  So this situation, like so many others, has to be managed very carefully.

People have talked about a $2 trillion bazooka in Europe, but the printing won’t stop at $2 trillion.  Egon von Greyerz has talked about tens of trillions of dollars that will need to be printed.  I just don’t think people fully understand what the corresponding move in gold will be as the money printing really begins to accelerate. 

Jim Sinclair correctly identified that there would be ‘QE to infinity,’ and he has talked about this, but I still don’t think people truly grasp the horror of the destruction that will take place, in terms of the loss of purchasing power in the various fiat paper currencies as the printing presses are really heated up.

Circling back to gold, what this means is the demand for physical gold is only going to increase.  This is why the price rise will steepen over time.  The bottom line is the physical market is already tight with the current demand.  As the demand increases, it will be very costly at that point to acquire physical gold.

If you bring this back around to my earlier comments about the possibility of a commercial signal failure, the countries in Asia have figured out the devaluation game and they are buying very large quantities of physical gold.  So as I mentioned, they are the ‘wall‘ of buying the commercials are running into in the mid $1,700s. 

So who will blink first? I have no idea in the short term, but long term, the demand for physical, deliverable gold is backed by central banks with hundreds of billions to spend.

I'm more bullish than ever, long term, on gold. I almost cannot imagine the fundamentals getting better for gold until we have a complete collapse in Western currencies.

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