Gold Market and Precious Metals Commentary

Technicals

"It's the same old song." "16 (160) tonnes." The technicals continue to be meaningless in the gold market. Worth zip-dee-doo-dah. They are constantly overshadowed by the bullion dealer crowd and most likely Peter Fisher, the No.2 man at the New York Fed.

I will get into that below, but as far as the big picture goes, the risk/reward ratio in the gold market still remains as good as it gets. After the breakout of a saucer bottom, gold has retreated to the middle of the recent range. The gold open interest is now all the way down to 187,413 as the specs are being jerked around every which way and fading from the scene for the moment.

Silver continues to make higher lows and is holding on to its very constructive technical pattern. Longs are continually being stopped out which is lousy for those exiting, but bullish for the big picture as the silver market is constantly cleansing itself and creating a "wall of worry" to climb to much higher heights.

The XAU at 67.51 has closed higher the past two trading sessions while gold was trashed lower by Goldman Sachs, among others. The divergence between gold and the XAU and silver is very noticeable and continues. The XAU is 50 percent off its lows of last August and silver is about 20 percent off its lows. Gold is plodding along only $5 off its 20-year lows.

That tells me that "the collective consciousness" understands that the gold price has been "held" down and not "allowed" to rise. The collusion crowd knows that the forces doing the gold market manipulation have a "tiger by the tail" and that tiger is one angry cat; it will not be long until the tiger gets loose and when it does, the XAU will rocket to the upside along with both silver and gold.

Fundamentals

The demand for gold is surging around the world (see stories below). It would appear that some of the bullion dealers led by "Hannibal Lecter" (Goldman Sachs) and the New York Fed's Fisher have made a long term strategic error in their manipulation of the gold market.

Perhaps they had no choice because of the desperate nature of their situation, but by calling in the British to sell their gold, thereby causing the gold price to tank some $35, they have unleashed powerful demand forces that are devouring up the newly priced cheap gold.

We know this is true from the recent World Gold Council statistics that show that gold demand was 4 percent greater last quarter than any other in history and will even be greater this quarter. For example:

"Hong Kong, Aug. 20 (Reuters) -- Physical demand for gold in Asia, which helped to lift worldwide demand to a record high in the second quarter of 1999, should continue through the year, traders said on Friday. They said prospects of gold harvests in India, end-of-year holiday buying and a trend to repurchase gold that was sold during the hard times of Asia's financial crisis in 1997 and 1998 were boosting demand.

"'People in Taiwan and South Korea are buying back what they sold,' a trader said. Taiwan's demand rose 44 percent in the second quarter year on-year."

"Tokyo, Aug. 20 (Reuters) -- Gold purchases by Japanese investors have more than doubled this week as retail prices tumbled to a fresh 26-year low in response to the dollar's sharp decline against the yen, bullion traders said on Friday."

As a result of this surging gold, demand our camp believes that the monthly supply/demand gold deficit is now 160-180 tonnes per month. That is a "tonne" of gold that the Hannibals have to come up with to keep the gold price from rising to a much higher equilibrium point.

Yes, the shorts have a big problem. Where do they come up with that much gold EVERY month? That is what they will have to find unless the price of gold rallies sharply from here and some sticker shock slows demand down.

Now we know the shorts are feeling the pinch. That is why Goldman Sachs took delivery on so many of the August gold contracts. There was a question until Wednesday whether the longs could find enough deliverable gold to avoid a squeeze. Midas told you by email that we got the word on that day that the shorts secured the gold for delivery, but they had to pay a nice little premium to do so. There is just not much deliverable gold right now in New York. Refineries are booming and we are headed into a seasonably strong demand period for gold.

The desperate Hannbials pulled the Abbot and Costello English gold sale out of their hat and, in addition to the British gold, it surely has attracted some other official sector, and or, producer selling.

Newmont Mining is a classic example of Hannibal's modus operandi. Newmont Mining has been a hedging holdout. With gold demand surging and the price of gold at 20-year lows, the last thing they must have wanted to do his sell forward down here. But Hannibal probably went to them saying, "With all your debt, we think your credit lines look a little shaky." That is, "Hedge or else."

According to Bloomberg News, it was discovered on Friday afternoon that "Newmont Mining Corp., the world's second largest gold producer, said it acquired put-option contracts giving it the right to sell 2.85 million ounces of gold at $270 an ounce."

I also understand that Newmont sold 2 million ounces of July 2009 calls at a strike price of $385.

Midas will go into this transaction in greater detail this week and will explain to you why it looks like the strategy of a real gold bull. Under the circumstances and "the gun," Newmont's move makes sense. Hard to swallow, but logical. The Hannibals will let them stay in business for a year while most of Newmont's 60 million ounces of gold in the ground will still benefit from a sharp move up in the gold price.

Remember a while back I told you that Chase was selling and Goldman Sachs was buying. Chase was doing the deal for Newmont. That gave Goldman a chance to cover and control supply of the New York gold for the August contract. By taking the gold in their own hands, they made sure no one else to took it to squeeze the New York gold market; that, God forbid, might create some gold market excitement. Hannibal Lechter and the New York Fed's Fisher did what they could to make sure that did not happen in the end. Then again, there are still five days to go before the August contract expires.

Of course Goldman Sachs was buying while Newmont was adding the needed gold supply to make short covering a snap. As I said, more on this soon, but it looks like the Newmont gold supply that was fed into the market as a result of delta hedging was a little more than 100 tonnes. That 100 tonnes of gold was needed by the Hannibals to keep the price of gold from rising to a higher equilibrium price. As it was, the price of gold rose $10 off its lows anyway.

It was not 24 hours after the shorts were notified last Wednesday that enough 100-ounce bars were secured for New York delivery to avert a delivery squeeze that Goldman Sachs was going around telling producers that they had better sell forward because the hedge funds were lining up on the sell side. Then on Thursday night I was notified by a top-notch source that Goldman Sachs was selling down the Australian dollar hard (noticeable because Goldman put out a bullish report on the Aussie dollar earlier this year, looking for A72). A cheaper Aussie dollar would make Australian gold producers more likely to do some forward selling.

Goldman also come out selling the Comex on Thursday and on Friday bashed the close when most traders had left for a summer weekend. Goldman told sources of ours that the trade was done for "a client."

The "client"? We have suspected that one of Goldman Sach's clients may be the New York Fed. There is a big hole in the supply demand numbers. Supply of gold has been hitting the market for some time from some unidentified source. We think it may be the New York Fed. After all, Alan Greenspan said last year, "Central banks stand ready to lease gold in increasing quantity should the price rise." Maybe he meant to leave out "should the price rise." Midas has documented the close connections between the U.S. Treasury, New York Fed, and Goldman Sachs. If the Fed does have an account at Goldman Sachs, it would be known to only a few; that is for sure. Yes, only a few would know about "the client."

That brings me back to the Bank of England sale and resultant gold price drop that has caused a demand surge. The Hannibals need to come up with that 160-180 tonnes of gold supply this month AND next month. The scheduled Bank of England sale will net them only 12.5 tonnes per month spread out over the next two months. Has our officialdom called in a favor or two to bring on some other closely allied central bank sales? There aren't a whole lot of Newmonts out there to harass.

This email from Peruvian Cafe member, A.A., will give you some idea of the psychology and market fear Hannibal is trying to elicit about the gold market:

"The other day Carlos Galvez, chairman of the Peruvian Gold Producers Association, starts talking out in public for the first time in years, practically begging for local regulation to allow gold derivative activities. Galvez is also CFO of Buenaventura, largest miner in Peru, which owns 43 percent of Yanacocha (Output FY99 at 1.65 million ozs, costs at $100), with Newmont (51 percent). I think it is obvious that the change of attitude has to do with Newmont's change of attitude. Since Newmont and Buenaventura have several joint exploration projects under way, It is easy to conclude where the pressure came from."

On Friday the gold lease rates shot right back up some 60-70 basis points as the six-month rate reached 3.65 percent. That means someone is willing to borrow $257 gold, with the upside risk that entails, and pay a 3.65 percent interest rate. If the price of gold goes back just to $300 over the next six months, the effective interest rate on the gold loan will be prohibitive.

This is dangerous borrowing, or is it desperate borrowing; meaning the shorts need physical (borrowed) gold to be fed into the physical market place to hold the price down.

This is why it is so important to monitor what is really going on in the gold market. When the U.S. trade deficit balloons 20 percent higher than the pundits predict and gold immediately gets socked $2, there can be no greater example that the fix is on and that the shorts are scared to death of gold. If gold were to rise sharply on that news, the manipulators might fear that the gold barometer would indicate potential dollar and credit market problems, so they bash it.

They are afraid that if gold acts as it should, when it should, upward price movement might attract latent buyers that have shied away from gold because of its recent poor price action and failure to rise on news like this in the past. The manipulators are now obligated to reinforce this negative gold pattern every time news comes out that should be bullish for the gold price.

The problem is we are on to them now and it is getting TOO obvious. And the natural supply/demand deficit is making it much more difficult for them to maneuver. They are running out of bullets, and as they do, the gold price will rise. But more importantly, the Hannibals and the New York Fed are setting a tone of a loss of credibility when the gold market manipulation scandal is exposed.

By then the gold market will have begun its move to the upside in earnest. The world will then realize the gold loans (10,000-14,000 tonnes) are too large to be covered quickly and panic short covering will kick in; covering of naked calls by the writers of those calls will be like jet fuel for the price of gold and that buying will propel the price even higher; then the speculative world will jump in for a piece of the exciting action of this tiny physical market.

Many other financial markets may be in disarray by then. Gold will go from the outhouse to the penthouse. By paying attention to what is going on now, you will be around for the fun and megabucks coming to gold market bulls.

Potpourri and the Gold Shares

It is very unusual for central bankers to speak out publicly on policy issues that are controversial. Just not their style. Terry Smeeton was the No. 2 man at the Bank of England for many years and sent a letter to the Financial Times this week. It is revealing in the sense that his comments subtly demonstrate the complete disarray in British officialdom about the Bank of England gold sales. An excerpt:

"The resulting rise in the foreign exchange reserves (or "net" reserves, as the Treasury now seeks to define them) not only is desirable for the long term but would have the consequence of reducing the proportion of gold held, destroying any case for gold sales and thereby helping the producing countries."

Bill Murphy ( Midas )

Midas du Metropole

After graduating from Cornell University, Bill was a starting wide receiver with the Patriots of the old American Football League and has been around the financial and commodities markets ever since. He owned a futures firm in N. Y. that specialized in precious metals and was a contributor to Veneroso Associates, a global strategic investment firm and producer of the 1998 Gold Book Annual.

Midas: http://www.lemetropolecafe.com