The gold debate in a nutshell
Gold has been commoditised and is sooner heading to $35/oz than $350/oz
By James E. Sinclair
There is no deliberately crafted conspiracy to depress the gold price involving the Federal Reserve, US Treasury, Central Banks, Bullion Banks and Gold Producers.
This is despite the fact that a falling gold price is advantageous to hedging producers, bullion banks, the economic goals of the Federal Reserve, the general health of stock markets, the dollar and incumbent administrations.
The Exchange Stabilisation Fund operates without public accountability but would not have been able to manipulate the gold price if the market was fundamentally bullish.
The 21-year bear market for gold is the result of an informal, unintended Bearish Price Demoralizing Cartel of common interest.
The consequence has been to place the market for physical gold in a precarious and potentially terminal position.
The bearish cartel arose from being able to raise off-balance sheet financing for new supply projects.
Central banks have handled official sales responsibly and with regard to the market.
Producers have acted without regard for the market into which they sell their product. In practice they deal in arranged packages of bear spreads.
Producers are motivated to hedge by capital-intensive new supply projects.
Bullion banks have seduced producers with the lure of fast, cheap money.
The money is made available through short spreads as a hidden form of commodity market speculation on almost infinite margin.
Bullion banks are mere messengers, mechanisms for production.
The strategy of producers is financially naive and potentially disastrous.
Neither stockholders nor management of gold producers understand the critical weaknesses of their financial engineering strategy.
The publicly stated cost of gold produced for many major gold producers does not necessarily represent pure operating costs. They represent operating costs less credits from profitable but still open bear market spread positions.
Gold prices below $270/oz are close to the industry's real average world cost of production.
An ailing gold market is most injurious to gold producing developing nations.
Ashanti is a minor example of what could happen to an unprepared major hedging producer.
Other major producers were saved from disaster during the last gold spike because no mark-to-market was required at the time.
The gold derivative market is unstable because bullion trading has not kept pace with the volume of paper.
The derivatives market is made riskier by the lack of transparency in what is generally a private treaty market.
Contracts between producers and their derivative grantors lack transferability to any dealer and, secondly, there is no right of offset.
Disaster can be averted only if producers stop hedging and cover the risks in simple second derivatives.
A failure in the derivatives market may mark the death knell for gold.
The last word on hedging may rest with the courts where Ashanti Goldfields is now fighting a suit.
The low gold price is a time bomb, but for different reasons
By Daan Joubert (response to James Sinclair. See Sinclair's response to this article and the Joubert's subsequent reply.)
Conspiricists blame the sustained decline in the gold price on collusive manipulation by the bullion banks and the Federal Reserve.
The core problem is the leasing of gold by Central Banks to the Bullion Banks that facilitates forward selling by producers.
Central Bank leasing is a sensible strategy yielding a return on an otherwise "dead asset".
The "Gold Carry" that developed in conjunction with the hedge funds and the general conduct of the bullion banks is at the heart of the weak gold price.
Knowledge of the Gold Carry is by inference.
There is no formal cartel or conspiracy to depress the price of gold.
The five major player groups (Central Banks, Bullion Banks, Hedge Funds, Gold Producers and Jewellers) in the gold market lack the will and interest in a higher price.
Producer hedging has been a long-standing practice that only became unstable from 1995 onwards when the Gold Carry commenced as hedge funds leasing and dumping gold.
Producer hedging developed as means of boosting cash flow rather than to hedge against and profit from a falling gold price.
Bullion banks had hedge funds have precipitated the real weakness in the gold market.
Some miners act more like hedge funds than gold producers with a larger part of their income derived from financial engineering than physical operations.
Short positions incurred by bullion banks and including the derivative positions of the major banks have massively increased during previous price spikes.
These positions result from selling paper gold into rising demand.
Physical short selling is a potential catastrophe.
The consequences are dire not just for large hedge funds such as Long Term Capital Management, but also for the likes of Goldman Sachs and JP Morgan who will have to admit that their and their clients' gold loans will never be returned.
Non-regulation and excessive greed precipitated the current situation.
It is improbable that these risks were adopted in ignorance, but are rather the result of arrogance about the ability to contain the price of gold indefinitely.
One cannot assume with impunity the short positions that have developed, especially not in the tight gold market.
The problems in the market cannot be solely ascribed to producer hedging.
Bullion banks have cajoled and coerced producers and possibly hedge funds to increase their short positions and the situation has now gotten out of hand.
It must be noted that the greater size of the paper market over the physical market presents opportunities for price manipulation.
Gold will eventually break free of its paper chains and is more likely to reach $3500/oz than $35/oz.
Gold has lost its monetary day job
By Andy Smith (Response to James Sinclair)
Sinclair's argument fails to ask why gold is so cheap to borrow in the first place?
Because it is in endemic surplus as a commodity, not a money.
Gold lost its monetary status because the international financial system is robust and subject to discipline.
For a higher gold price, wind back the clock.
Gold had better be money
By James Sinclair (Response to Andy Smith)
The true role for gold was to prevent politicians from expanding currency outstanding at will.
The gold "surplus" would evaporate after 90 consecutive days of a higher gold price.
Paper is not a storehouse of wealth.
Supply vs Demand
By Brian Bloom (Response to Jim Sinclair)
Logic suggests the 21-year bear market for gold must be the result of excess supply.
Physical production has lagged consumption so supply must have been from central bank disgorgement and forward sales.
The end of the Gold Standard was possible because of burgeoning credit .
There has been an inverse relationship between the price of gold and credit expansion / USA equities.
The stronger the US economy, the weaker the gold price.
There is little logic in current dollar flows which suggests irrational behaviour.
The multiplier effect of gold hedging
By James Sinclair
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