Could this really happen??
In 1869, Jim Fisk and Jay Gould tried to corner the Gold market, and for
a
time, this notorious duo succeeded. It is a fascinating story, that is
relevant to what is happening in the Gold market today.
At the time, the Dollar was on the Gold Standard and still defined in
terms
of Gold at the rate of $20.67 per ounce. However, President Lincoln had
suspended convertibility during the war between the states, and in 1869
the
ability to redeem Dollar paper money for Gold had not yet been
re-established.
Gold was actively quoted and traded on the New York Gold Exchange
(NYGE), in
terms of 'Greenbacks', the irredeemable, fiat currency created during
the
war. Though denominated in terms of Dollars, fiat currency Greenback
Dollars
(hereafter, GB$'s) traded at a discount to sound money Gold Dollars
(hereafter, $'s). Prices were quoted at the NYGE in terms of how many
Greenback Dollars were needed to purchase $100, i.e., five Double Eagle
Gold
coins, which together weighed 4.838 ounces.
During the height of the war, with the prospects for the Union army and
the
outcome of the war still uncertain, over GB$250 were needed to purchase
$100.
With the war over, and the federal government's creditworthiness rising,
the
Greenback discount began dropping. When Fisk and Gould started their
manipulations, Gold hovered around GB$130.
Jay Gould was the mastermind of the two. He understood markets, and he
understood human psychology. Having initiated and participated in many
stock
squeezes, he also knew how to drive markets to a state of frenzy, and by
September 1869, his plan was well underway.
In those pre-air conditioned days, trading often languished in the
doldrums
of New York City's hot and muggy Summer. Those uncomfortable conditions
often
put markets into a sleepy state, giving many a false sense of security,
and
the Summer of 1869 was no exception. Even though Greenbacks still traded
at a
big discount to Gold Dollars, complacency reigned supreme, and Gould
knew
that the Gold market was ripe for a squeeze. All he had to do was crack
the
whip. And crack it he did.
Gold began rising in mid-September, and the price rise quickened the
week of
September 20th. Gould got some newspapers to help him in his task by
printing
stories that a Gold squeeze had begun. By Thursday, Gold had risen to
the low
GB$140's, but the real fireworks began the next day, September 24th,
what has
become known as Black Friday.
Brokers acting for Fisk and Gould began the day by wildly bidding up
Gold
from its GB$145 opening price, and those creating the corner stood to
make a
fortune. Using derivatives to maximize their leverage, Fisk and Gould
controlled calls on 5.5 million ounces of Gold with a face value of $110
million, an amount equal to the US Treasury's entire Gold reserve at the
time. It was without any doubt an enormous leveraged position, and Fisk
and
Gould stood to make GB$5.5 million on every GB$1 rise, and rise it did.
Panic was spreading throughout Wall Street, as the price rose
relentlessly
that fateful day. These manipulations affected every part of banking and
finance. Many faced ruin as Gold began to soar, and the margin calls
began to
mount.
The Gold price had risen to GB$162, when James Brown (who with his
brother
took over the firm started by their father, which exists to this day as
Brown
Brothers Harriman) stepped up to the plate. He sold 250,000 ounces to a
Fisk
and Gould broker at GB$160. Others alertly sensing a change in momentum,
also
stepped in on the sell side. The Gold price began dropping.
Shortly thereafter, the US Treasury announced that it was selling Gold
in
exchange for Greenbacks. When this news hit the floor of the NYGE, the
rout
began. Gold closed that day at GB$132. Its rocket-like jump and
subsequent
collapse left a trail of carnage and chaos. How well did Fisk and Gould
fare?
Gould never told his partner Fisk the whole plan. To make the corner
more
credible, Gould let Fisk keep buying on the way up and the way down
through
their regular brokers, thereby convincing everyone on the NYGE floor
that the
corner was for real and would not collapse. But without telling Fisk,
Gould
acting secretly through his own private broker, sold out their entire
position above GB$150 on average, and kept selling more than Fisk was
buying
as the price tumbled down.
Only after the end of trading that day did Gould share with his partner
his
entire plan for the corner. Instead of facing ruin as he expected, Fisk
learned the total net gain from their combined trading was GB$12
million.
Then to protect this hoard, Gould paid GB$2 million to two shameless
attorneys to lock up in litigation the assets of the NYGE and countless
brokers, as well as to defend the pair from the 300-plus law suits
subsequently filed against them. Some of this money also went to Boss
Tweed,
who through the Tammany Society controlled New York City's finances and
politicians.
So Fisk and Gould were left with GB$10 million to split between them _
not
bad for a couple of week's work. But why have I related this long story?
I believe that within two weeks, another Gold squeeze will start from
the
depths of a typically hot and humid New York summer. Like the squeeze of
1869, the market now is far too complacent about both Gold and the fiat
currency of our day, the Federal Reserve Dollar (which differs from a
Greenback Dollar in name only). And conditions are ripe for a successful
squeeze, most notably in the low Gold price and high Gold interest
rates.
At $260, the price of Gold is abnormally low, while at the same time,
Gold
interest rates at 3% plus are abnormally high. In contrast to the Dollar
and
other fiat currencies which can be manipulated to any artificial end
determined by the central banks that create them, Gold is money that
depends
upon the freemarket process. The reason? Unlike fiat currencies, Gold
cannot
be created by bookkeeping sleight of hand out of thin air. Therefore,
central
banks do not have an unlimited supply of Gold, which is the necessary
ingredient for any ongoing successful central bank intervention.
Consequently, central bank manipulation of the Gold market has limits.
In order for interest rates to return to normal, i.e., under 1%, the
Gold
price must return to normal, i.e., some price over $400 per ounce. This
high
Gold price is needed to bring metal back into the market, thereby
increasing
liquidity, which in turn will cause Gold interest rates to drop toward
normal
levels.
The abnormal conditions now prevailing in the Gold market provide the
opportunity for the spike. And the spark is being provided by Goldman
Sachs.
This past Thursday, Goldman Sachs responded publicly to its actions
taken
over the past few days behind the scenes on the Comex. Goldman announced
that
it had given notice to the Comex that it was standing ready to take
delivery
of about 473,500 ounces of Gold, about one-half of the total weight in
Comex
vaults. It was according to a Goldman spokeswoman "all within the normal
course of business." While taking delivery from time to time is of
course
entirely normal, the weight of this delivery is far from normal.
Further,
Goldman is said to control most of the 3,537 August contracts still
outstanding, meaning that it could take delivery of even more metal,
possibly
nearly depleting Comex stocks.
What are the reasons behind this move by Goldman? Well, let's see if we
can
put two-and-two together.
There have been rumors and some press reports that the big Tiger hedge
fund
is in trouble. Apparently, even though this hedge fund reportedly has a
sterling long-term track record, their performance this year has been
poor.
Importantly, in the continuing aftermath of last October's Long Term
Capital
Management debacle, investors in hedge funds these days are not very
patient
_ they are withdrawing their investment quickly at the first hint of
poor
performance. Thus, Tiger has been suffering withdrawals of capital,
which has
required Tiger to liquidate investments to provide the funds needed to
meet
these withdrawals. Now here is where it gets interesting.
Australia's largest Gold mining company is Normandy Mining (NDY).
According
to NDY's fourth quarter report dated June 30th, Tiger owned 11.68% of
NDY. At
present prices, the face value of that position is about US$156 million,
surely not one of multi-billion Tiger's biggest positions, but
nevertheless,
it still is a big chunk of change.
Tiger acquired this stake from another Australian company a couple of
years
ago around A$1.75. NDY is now trading at A$1.20, and before the latest
run-up
in the Gold stocks was around A$1. But don't shed any tears for Tiger.
As I understand it, Tiger did what most hedge funds do; they hedged this
position. How? Tiger had sold short Gold bullion, and its gains from
this
short position as the price of Gold slid lower have more than offset the
losses on the drop in the NDY stock price. But these are paper profits,
and
now the hard part for Tiger begins. How do you unwind this huge position
without eroding your paper profits? Taking profits becomes exceptionally
important when you need the cash to meet investor withdrawals, as Tiger
apparently now does.
The first thing to do is buy the Gold needed to cover the short Gold
position, and here, Goldman once again enters the picture. The metal now
being accumulated by Goldman on Comex will I understand be delivered to
Tiger, to enable Tiger to cover its short Gold position. What I hear is
that
Tiger will then unwind its long NDY/short Gold trade. In other words,
Tiger
has already purchased this metal on a forward basis. Goldman is Tiger's
broker on this trade, and Goldman will deliver to Tiger the metal
Goldman
will obtain from the delivery it is taking on Comex. Here's where it
gets
really interesting.
During the delivery of any month, it is the shorts that choose the time
to
deliver on their short position. The longs have no option but to wait
for the
shorts to decide when to deliver, and normally the shorts wait until the
end
of the month This slowness to deliver is understandable because it
enables
the shorts to earn interest as long as possible. This month the shorts
must
deliver by August 27th, which in Comex terms is the end of the month.
Somehow
and from somewhere, the shorts must come up with 473,500 ounces of Gold
bullion, and possibly more if Goldman takes delivery this month on even
more
Gold.
No problem, you say, because there is 948,973 ounces of Gold in Comex
vaults?
Well, that is true. But who owns that Gold? What if none or few of those
ounces are owned by those who are short the Gold that must be delivered
to
Goldman Sachs? In that case, where will the shorts get the Gold they
need to
deliver to Goldman?
Therefore, on or before August 27th, which is the last delivery day, one
of
three things will happen, AND IT ALL DEPENDS ON WHETHER OR NOT THE
SHORTS OWN
THE 948,973 OUNCES OF METAL IN COMEX STOCKS.
1) If the shorts own this metal, they deliver metal to Goldman, and the
Comex
stocks will drop by 500,000-700,000 ounces (which is the weight that I
expect
Goldman to wait for delivery). The upward pressure on the Gold price in
this
case may be muted, and the squeeze in all likelihood averted for the
time
being. If so, all the shorts who have driven down the Gold price to its
abnormally low level can continue for now to wring out every penny from
their
short position.
2) OR, IF THE SHORTS ARE NOT THE OWNERS OF THE METAL IN THE COMEX
WAREHOUSE,
we will get a huge short squeeze as the shorts try to find metal to meet
their commitment. And I do mean HUGE, because there is no metal in the
pipeline not already committed. The high Gold interest rate is a stark
warning to the shorts that metal is not available.
3) Or finally, the market goes berserk because of the short squeeze and
the
Comex announces a repeat of what they did to Bunker Hunt, i.e.,
horrendous
cash margins and only trading for delivery into Comex stocks is allowed.
This
alternative will probably prevent the short squeeze from reaching its
full
potential, but the Comex cannot be expected to act until the short
squeeze
has already begun. So there is still plenty of opportunity to make a lot
of
money on the spike that I expect in the Gold price.
The potential now exists to make the 1869 short squeeze engineered by
Fisk
and Gould look like child's play compared to what is coming up, if we
get
alternative #2 above. And my own guess is that we will get #2, but this
is
just my guess.
One other bit of info. Apparently, Goldman did not want to take delivery
of
this Comex stock (which they obviously knew would bring a lot of public
attention to this move), but Goldman had to tap Comex. The reason?
Goldman
could not get their hands on this metal from any other source! There's
nothing in the pipeline of this size not already committed, so this
shortage
of metal will add fuel to the fire of any short squeeze. This shortage
of
metal also explains why Gold interest rates are so high because as I
have
been saying in recent letters, there is no lender of last resort to the
bullion banks.
Without any doubt, it should be an interesting couple of weeks! In
nearly 30
years of commodity trading, I've never seen anything like this before,
but
the upside could be spectacular, even bigger and better than it was for
Fisk
and Gould.
THE BIG SQUEEZE If I've learned anything over the years, it is to not
underestimate the power of central banks and their willingness to play
'hard
ball' to enable them to keep their hands on that power. Witness the Gold
sale
by the Bank of England as evidence of my proposition. So if a big
squeeze in
the Gold market does occur, will the Federal Reserve stand idly by?
Probably
not, because I doubt very much whether the Fed would like to see the
Gold
price scoot to $500 per ounce in a fortnight.
We must therefore try to think through the other options as to what
could
happen if the Federal Reserve sticks its nose into the Gold market, if
it
hasn't already done so (some argue that the Fed already has its hand in
manipulating the current low Gold price). In any case, some of its
options
are:
1) The Fed gets its central bank pals to lend metal, throwing to the
wind any
concerns they may have about the solvency of their counterparty and/or
about
their need for metal as Y2K approaches. This action would keep the Gold
price
and Gold's interest rate tame, much like what has happened since 1996.
2) The Fed gets more central bank pals (like Bank of England) to
dishoard
Gold. This option would accomplish much the same as #1 above.
3) The Fed brings in the federal government to intensify its anti-Gold
media
campaign. The nameless 'specs' are about to get bombarded with bad press
if
Gold begins to rise. The Fed will arrange with the media to get many
quotes
from friendly sources talking up what the Fed wants you to hear. Left
unsaid
of course will be the huge short position in Gold established over the
past
few years with central bank connivance, which has created today's
abnormal
conditions in the Gold market and made a squeeze possible.
4) The Fed gets the federal government to force the IMF to sell some of
its
Gold and/or to return Gold to its members, which will then be loaned
and/or
dishoarded by them, thereby providing enough metal to postpone the
squeeze.
These actions would also allow the abnormal conditions in the Gold
market to
prevail somewhat longer.
5) If all else fails, then the Fed asks the federal government to close
down
the Gold market and/or to confiscate Gold like Roosevelt did in 1933,
thereby
providing the opportunity for them to get their hands on enough metal to
relieve the squeeze. This time though, the Fed would probably get most
countries to participate in the closure/confiscation as well.
But if #5 happens, then I think the implications will be even far
greater
than just trying to prevent a Gold squeeze. We will in that case be
witnessing the end of fractional reserve banking, a system fostered by
central banks since the creation of the Bank of England in 1694. In
other
words, it will mean the end of the cartel given by governments to
commercial
banks to bilk a country's citizens in exchange for the power that
commercial
banks, through their ability to create fiat money, give to governments.
What
power is that?
Governments survive on fear and power, but they cannot create bullets
out of
thin air. So what do they do?
Through their captive central bank and partners in crime, the commercial
banks, governments create money out of thin air to buy bullets. This
observation explains what central banks work so hard to preserve, but
the
implementation of #5 above will show how desperate the central banks
have
become and how little power they have left to prevent a systemic
collapse.
There are parallels to the waning days of the Soviet Union, which could
not
in the end prevent the fall of the Berlin Wall, let alone the collapse
of its
unconscionable people control system.
In short, banks and governments will no longer have the ability to work
hand-and-glove toward their objectives, extortionate profits for the
banks
and unbridled power for governments. And it won't be a pretty sight.
The ultimate irony? The worst predictions of the Y2K doomsayers come
true,
but not because of computer problems and glitches. Rather, the monetary
system built upon nothing but promises collapses because people finally
realize that sometimes promises mean nothing, and if promises mean
nothing,
then the money from a monetary system built upon promises is worth
nothing.
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