The main point worth considering about Fridays spike in gold prices, what is behind it. First, we have the undefined dislocation in the bond market. There has been damage, but it is not clear how large and to whom. Assuming that some institutions have experienced large losses, they may have been forced to close out other speculative positions to raise capital or reduce overall market exposure. Secondly, Fridays employment report was not good putting pressure on a bond market that had plummeted for artificial reasons, reduction of outstanding 30 yr instruments. Finally, Placer declares a moratorium on hedging after gold had risen about 10.00. The gold price explodes. Looking forward, with a continuation of a rising gold price, the hedgebook problem we saw in October will reappear threatening some producers and the bullion banks. Further loses to the bullion banks will compound their bond trading losses. In the past with this kind of risk in the markets there has always been a fix. With the producers withdrawing from the hedging market, one leg of capping the gold price is lost. The BOE story is old news, Kuwait has made gold available for leasing and there may be others in the days ahead, however, with leasing gold coming under scrutiny there may be no takers. The last resort an outright sale. Who will sell and how much gold do they have. We know that the cb,s have approximately 32000 tonnes of gold on the books, but how much sits in the vaults. A direct movement of gold bullion may be required to cap the market in the weeks ahead. Issuing paper gold in a market flooded with paper will not due. Who has the gold and are they willing to put it on the market. The final and biggest question, will the producers support the price of gold by purchasing non mined gold filtered into the market to close out their existing short positions. One thing is certain, it is very late in the game, can the producers rise to the occasion.
Ken |
