By John Embry
Investor's Digest of Canada
The gold market has remained volatile with extremely positive fundamentals continually running head-on into blatant manipulation. Following a robust new price high that touched US$1,249 per ounce intra-day in mid-May in the wake of the European situation progressing from bad to worse, the gold market was subjected to a predatory raid just prior to the June option expiry on Comex. With some 18,000 contracts open at a US$1,200 strike price, it behooved the bullion banks and their cronies to ensure that the price on the day of option expiry was comfortably below US$1,200.
They succeeded and the hapless tech funds and other innocents transacting on the Comex once again had their pockets picked. The fact that this occurs repetitively in both gold and silver despite an ongoing Commodities Futures Trading Commission investigation into just such activity is remarkable.
Ted Butler, who I regard as the world's leading expert on silver and its market machinations, perhaps summed it up best in his recent newsletter when he stated:
"Increasingly it is looking like CFTC is the most hopeless or corrupt federal agency of all, in spite of great hopes by me for change that Gary Gensler might bring."
As a matter of interest, Gensler is the former Goldman Sachs co-head of finance, who was installed as head of the CFTC in early 2009.
I am actually somewhat more optimistic than Butler when it comes to the ultimate response from the CFTC. It is admittedly a bureaucratic organization but, following the explosive revelations at its March hearing with respect to position limits on gold and silver on the Comex, it seems to me that it is painted into a corner and will be forced to act or lose all credibility.
Gold immediately turned around following the option expiry and rallied smartly. This occurred despite considerable talk about negative seasonal influences.
Historically gold has tended to be weak during the summer doldrums but that is primarily attributable to the past importance of jewelry demand in the overall equation. There is most assuredly a significant seasonal aspect to the jewelry business. However, with investment demand for gold having dramatically taken over as jewelry demand simultaneously declined, seasonality becomes less of an issue because economic and political crises pay no heed to the calendar.
There has been a recent spate of negative gold price predictions emanating from the usual suspects in the banking community, most notably Barclay's and Societe Generale which both posted US$800 price targets. I would submit that their thinking is very flawed because like most bears on the subject they assume that investment demand for gold will wane when things return to "normal." As much as I would like to see things return to the serene conditions of past eras, it simply isn't going to happen this time.
The monetary genie is clearly out of the bottle and there is no way on earth it's going back in. In fact, I believe the new normal is increasing monetization of sovereign debt because there will be no other viable alternative. Government austerity is nothing but a pipedream. This essentially ensures unlimited investment demand for gold driven by rapidly accelerating monetary debasement.
I actually find it vaguely amusing that anyone who suggests that gold is going to US$3,000 per ounce or higher is immediately dismissed as a wild-eyed radical while those who project ridiculously low prices are accepted at face value. I personally believe that there is a much better case for gold valued in the multi-thousands than there is for it ever declining below US$1,000 again and it all relates to the value of fiat paper currency.
Does any thinking person really believe that the authorities can somehow restore actual value to the world's reserve currency, the U.S. dollar, which has been the recent darling in the currency competition? A report from the Bank of International Settlements has revealed that the U.S. structural budget deficit (the amount of the deficit adjusted for the economic cycle) grew from 3.1 per cent of GDP in 2007 to a staggering 9.2 per cent in 2010.
This doesn't even include the massive liabilities attributed to the debacle in the housing industry that has seen the socialization of housing losses via the bailout of Fannie Mae, Freddie Mac and the Federal Housing Administration.
When the foregoing is considered in the context of US$13 trillion in imbedded debt, more than US$50 trillion in unfunded social liabilities, a chronic current account deficit and the defacto bankruptcy of many individual states, only a heroic optimist would be prepared to ascribe any long-term value at all to the U.S. dollar.
With Europe, England and Japan all in various states of terminal decline at this point, it will be up to China, and its fellow BRICs (Brazil, Russia, India) to provide a worthy currency. I have long believed that the 21st century will belong to the Far East with China as the bell cow much in the same fashion as North America ruled the previous century.
However, the idea that China is going to move forward smoothly at a breakneck-growth pace ad infinitum as the rest of the world deals with its monumental problems strikes me as somewhat fanciful. As successful as America was in the 20th century, it did endure the "dirty thirties" and two world wars and to think that China with its command economy and mounting dissent among the citizenry is going to escape an ugly setback seems naïve to me.
The conditions are certainly in place for a rough patch following the massive state-mandated bank lending binge in 2009. It did succeed in averting an economic setback at the time and fuelled another 10 per cent plus growth year, but considering the magnitude of the lending, the growth wasn't as impressive as many think. More importantly, the residue includes a property bubble, considerable industrial overcapacity, a mounting inflation issue and serious questions about the stability of the banking system.
To deal successfully with these issues while the rest of the world's demand for Chinese exports is receding will be a challenge. A number of analysts much smarter than I are predicting a crash in China. I'm not sure that I would go that far but some disruption seems inevitable.
In that event, where in the world of fiat paper currency would any serious investor really feel comfortable? I strongly suspect that J.P. Morgan's famous adage uttered a century ago that "gold is money and nothing else" is about to reassert itself in a big way and the resulting price impact is absolutely going to shock the skeptics on gold.
To conclude, there was a fascinating debate on Jim Puplava's Financial Sense radio program recently and it pitted the Gold Anti-Trust Action Committee's indomitable leader Bill Murphy against long-time gold cartel apologist Jeff Christian of CPM Metals on the subject of gold price manipulation.
I will acknowledge my bias on this issue having been totally supportive of the evidence uncovered by G.A.T.A researchers on the subject over a period of more than 10 years. Having said that, the first real red flag on Christian in this debate was his insistence on professing his honesty and belief in the truth. In my long experience when a person has to advertise his character in this way, it generally serves as a caution that he may have some issues in that particular area.
Aside from that, he made what I consider to be two particularly outrageous claims. The first pertained to central banks' alleged indifference to gold. In essence, he asserted that they wouldn't bother to manipulate something so trivial in the big scheme of things. In reality, western central banks are terrified of gold because its represents real money in competition with their bogus fiat currency and they have severely abused gold in the past and will continue to denigrate the yellow metal any chance they get.
Then Christian upped the ante with his comments on the infamous British auction announcement in 1999. He suggested that the British had long contemplated a sale of their bullion and were responding to market criticism that central banks were insufficiently transparent in their gold transactions by totally telegraphing their intentions. This is beyond preposterous.
The Bank of England professed that it knew nothing about the proposed sale and that it was a unilateral decision by then Chancellor of the Exchequer Gordon Brown for reason known only to his small circle. That it was done in a way to ensure the lowest possible price only added to the stench.
When one is confronted with distortion of this magnitude, there is a natural tendency to disbelieve most of the fatuous arguments put forth by Christian. In my mind, Murphy easily won the debate by merely stating the obvious.
Anyone who doesn't acknowledge widespread chicanery in both the gold and silver markets is either complicit or simply isn't paying attention. The great news is that all manipulations ultimately fail, and when this inevitably occurs in the previous metals area, the upside impact is going to be huge.
Editor's Note: John Embry is chief investment strategist at Sprott Asset Management Views expressed are those of the author and should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Managements Inc., Mr. Embry's articles appear regularly in Investors Digest of Canada, 133 Richmond St., West, Toronto, ON M5H 3M8, 1 year, 24 issues, $137.
