The Coming Jump in Gold Prices
Did you know that the Federal Reserve Bank owns gold certificates? Mounting evidence suggests the Fed intervenes in and participates in the gold and silver markets on a regular basis. Interviewed Monday last week on the “Trading Day” program of Business News Network in Canada, former Federal Reserve Governor Lyle Gramley hinted that a big upward revaluation of gold may figure heavily in the Fed’s attempt to rescue the U.S. economy. The program’s guest host, Niall Ferguson, an author and history professor at Harvard, asked Gramley, now senior adviser at Stanford Group in Houston, about the seemingly grotesque expansion of the Fed’s balance sheet in recent months. Ferguson asked: “I’ve heard it said that the Fed has turned into a government-owned hedge fund, leveraged at 50 to 1. Do you feel nervous about what this might actually do to the Fed’s reputation?” Gramley replied: “I think you have to reckon with the fact that one of the Fed’s assets is gold certificates, which are priced, as I remember, at $42 an ounce, and if we were to price them at market prices, the Fed’s leverage would look a lot less than it is now.” While valuing the U.S. government’s claimed gold reserves at today’s Comex closing price of around $822 per ounce instead of the government antique bookkeeping entry of $42.22 per ounce would indeed vastly expand the government’s monetary assets, it might not be enough to offset the liabilities and guarantees the government lately has taken on. But the job might be done by revaluing the gold to $5,000 or $10,000 per ounce, as the British economist Peter Millar speculated two years ago might be necessary to prevent
debt deflation: yet this is admittedly speculation. What did Gramley mean by “…the Fed’s leverage”? That would suggest that the Fed not only owns “gold certificates” but also future contracts and options on futures. They might be big benefactors in a gold squeeze. Speaking of a gold squeeze, I read another report from the Gold Anti-Trust Action committee (GATA) saying that the Comex is warning brokers of a December gold squeeze. Yes, the Comex is alerting various futures firms about the potential of a squeeze on the December contract and is advising the $840 December shorts to exit their positions. That is the remaining open position. There have been 12,636 notices of delivery. The shorts have until December 31 to make delivery. Normally they deliver early to take in cash and earn the interest. They must be delaying. As I understand the situation, that represents about 40 percent of the gold available at the Comex, and of course someone could enter the scene late, buy February gold, and then spread into December, which would stun the shorts. My broker friend said his back office said this sort of alert is highly unusual and that the concern is real, not only for gold, but for other commodities too, like copper and palladium, as there is a good deal of talk of taking deliveries there too. But gold is the one for which the advice to cover went out. This is an extremely productive development and could spur the price of gold up quickly as word spreads. As we all know, buying Comex gold and silver (the cheapest way to buy precious metals) makes all the sense in the world in this financial environment. This might just be reason enough to begin “stocking up” on some of the ETFs that would be beneficiaries like GLD, SLV and The PowerShares DB Commodity Index Tracking Fund (DBC). The 1-year chart below is instructive. It might be one of those “ready, get set, not yet” approaches to what an investor should do. The economic news and the relapsing into the next and possible worse phase of this credit crisis, great-recession, and deflationary mess might delay the upside potential on commodities. But if you’re a trader (a.k.a. “gambler”) there might be a short-term pop in at least gold over the next couple of weeks…maybe spilling into January 2009 where quick profits could be made….as well as some quick and disappointing losses. Are you an investor, a short-term gambler, or both? No matter what the answer, if you know yourself well then you know how you might respond to all this news and the rumor mill. Best of luck! When FCX dipped back down near $16 after the suspension of their dividend I decided to pick up a few shares for a quick trade. I’m fortunate that it worked out. I firmly believe that there will be a trading range for all the better commodity stocks and ETFs that will give us several chances to buy low and sell high over the months directly ahead. Your comments on that will be appreciated. Happy holidays to you all.Some interesting names in the copper business to keep an eye on and begin accumulating on any meaningful pullbacks are Freeport McMoran (FCX),Southern Copper Corp (PCU) which as of this writing still pays a dividend, unlike FCX, and Sterlite Industries (SLT) which is India’s biggest copper producer and is poised to benefit from any resurgence of copper demand in Asia.
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