Wednesday, June 26, 2013

Friday's the Last Day to Scare You Out of Gold (Friday Update)

Not surprisingly, banks (possibly aided by Western central banks) are doing everything they can to push the paper price of gold down before the last trading day Friday for gold futures and options.

As you'll see below, the most recent attack began During the thin trading of Hong Kong trading hours of June 25th. If you were a seller of a massive amount of gold you wanted to sell for the best price, this would be the worst hours to sell.

But if instead, you didn't care about best execution of the trade and instead wanted to push the price down, this would be the ideal time to sell massively into a thinly traded market to have the greatest effect on price. Then, the algorithmic computer trades would take over and accelerate the selling.

But why would anyone do this? Well as I've mentioned before, physical gold is in short supply as demand has exploded from Eastern central banks to individual savers world wide. If you're a bullion bank watching a run on your vaults by your customers, you may want to slow the bleeding. And if you have illegally lent your clients gold out and are now having trouble getting it back when that same client is demanding delivery, you really have a problem. So what's their solution?

Easy, create more paper gold shorts by writing more derivatives to bring down the paper markets. After all, the contracts (derivatives) cost virtually nothing to create and when the gold price crashes, they will:
  1. Discourage people from wanting to receive and hold REAL PHYSICAL gold.
  2. Buy back the physical gold at a lower price to replenish some of your inventory.
And hey, if they can just get more sellers of the GLD exchange traded fund to sell, well that just frees up more physical gold to be bought.

Of course last time they did this, as I've written, demand for physical gold exploded around the world. I would not be surprised to see this continue as the fundamental for owning gold have improved not declined.

There may be little more supply at this price.

Zero hedge today posted an interesting analysis showing that we are now trading close to gold miners marginal cost. At these prices, gold miners will scale back or stop producing, further limiting any new supply.

As shown two months ago, the marginal cost of production of gold (90% percentile) in 2013 was estimated at $1300 including capex. Which means that as of a few days ago, gold is now trading well below not only the cash cost, but is rapidly approaching the marginal cash cost of $1104...

Which means that of the following mines (as we showed here) which make up the gold cost curve, one by one, starting on the right and going left, production is going to go dark, even without the recent demand by South African gold miner labor unions to have their wages doubled. Until eventually virtually no gold will be produced.

It is at that point where one must apply the New Normal supply and demand curve, when one can predict a $0 per ounce price for gold, as physical demand continues unabated, while actual physical, not paper, production has now started going offline.

Joking aside, not even Bernanke and all the paper Gold ETFs in the world will be able to do much to suppress gold prices from reaching their fair value when gold production hits a standstill, and when demands, especially by China, is still in the hundreds of tons each year.

And of course, as Andy Sutton says:

Personally, I am hoping the paper markets crash and burn. I'd have no problem seeing $500 paper gold and $2000 physical gold. The end of that sham will be an amazing site.
Watching JP and the boys squirm as they try to wiggle their way out from under all the foul paper bets they've made would be even more fun, but unfortunately we have nearly two century's worth of history on how that one will end. They will run to the government, which will promptly let them off the hook, just like they did for the silver banks in the 1800s. Unfortunately, there is no Andrew Jackson; at least not yet.
 and my favorite:
 The quislings on television who are gleefully bashing precious metals this morning? They want them. They want your physical metal. These folks will swim through any sewer to get that which they desire.
And finally the Fed? Well, with the end of June comes the end of the second quarter. You will soon be hearing about how "gold lost 20 something percent" in just the last quarter, "proving" its no longer the safe haven it was once thought to be. And that is a HUGE benefit to central bankers everywhere that don't want you to know your currency is be devalued by massive printing. Heck, if you figure that out you might realize your pay is declining, not rising and you might take to the streets.

Of course, a troy ounce of gold is still a troy ounce of gold but you now can buy it 33% off its two year ago price, even thought your dollars are now worth less. Would you want to buy low? Or buy the bonds and stocks near their all time high?

My conclusion? If you you missed gold when is was sub $1,000 and just started paying attention to gold over the past two years, this is an opportunity. Supply of the physical is short, but the price is at the miner's production levels. Dollar cost average.

Update Friday 11:30 PST

Things are getting insane. From ZH:

So to sum up today's remarkable market... Equities and Bonds are rallying hard on the basis that there will be no end to QE; and gold is crashing because QE is ending?
Perhaps some context is in order...

No comments:

Post a Comment