The great gold price manipulation day of reckoning nears…

“We have always had a position in gold. When you think about the largest central banks in the world, they have all moved to unlimited printing ideology. Monetary policy happens to be the only game in town. I am perplexed as to why gold is as low as it is. I don’t have a great answer for you other then you should maintain a position”.

That comment was made some months ago by the billionaire fund manager Eric Sprott. Like many of us, in particular here at Spreadbet Magazine, Sprott has been perplexed with just what has been going on in the gold market in recent years. Put simply, it is utterly illogical that gold prices should decrease under the massive globabl quantitative easing programs.

What with nearly a trillion dollars being printed every year, one would be forgiven for expecting the gold price to rise, not to drop. At the same time, with the supply of gold being tight, there also being heavy demand for the physical from the East and the true cost of production near $1,300/oz, it is head scratching to try to justify the current price near $1,270/oz.

While it is difficult to understand the current dynamics behind physical gold price formation, some clues may come from the futures market. “There may not be enough gold to go around if everyone with a futures contract insists on taking delivery of physical bullion”, said the veteran trader Tres Knippa a few days ago. He believes that there’s a broken link between value and price. That is, paper gold is trading below the actual value of physical gold and so the really smart traders may wish to take delivery on gold futures (or buy the actual gold mining companies that own the stuff!)

Eric Sprott actually believes that both the Comex and the LBMA are way, way short of the inventories required to fully back the physical metal should even a fraction actually be demanded for delivery. God forbid some large entity forces delivery we may actually experience a default by one of these exchanges! Currently, there are just 11 tons of gold in Comex vaults, which is ridiculous low with China alone is importing 100 tons per month. The following chart clear depicts in utter clarity the situation in which we are at the moment…

The Comex leverage ratio (paper trading v physical backing) has been exploding and currently sits at 112, which roughly means that there is 1 ton of gold for each 112 tons traded in paper. Put another way, 111 of 112 tons are undeliverable!

For years, Sprott, the GATT, and other entities have been warning about massive manipulation occurring in the gold market, conducted by JP Morgan, the Comex, the LBMA, and of course by major central banks. What with the FT getting on the story yesterday suggesting that like the Buba you should demand delivery, elementary demand-supply rules are enough to tell us something is not right. With the US Federal Reserve having injected under their QE programs some $4 trillion of freshly minted dollars, to us, the only way for the market to restore equilibrium would be for the price of dollars to go down abruptly, and in particular against gold. Curiously that hasn’t been the case…

Like many other seasoned old timers, we believe that the dollar is being manipulated in order to keep its price above its true value and allow the US to maintain its veneer or global superpower. After all, if people lost faith in the dollar, what on earth do you think would happen to the mightiest military power on earth – how would it continue to finance those machines of destruction? In order to accomplish the primary objective of maintaining this status quo, we believe that there is a co-ordinated effort to manipulate lower the price of gold. However, with China buying 100 tonnes of gold per month and the metal massively flowing from west to east, it won’t take long until a default occurs and that’s when things get interesting as even 3D printers (nor the FED) aren’t yet capable of printing gold!