This was what EC apparently wrote to someone who asked him whether the price of metals would drop.
Awesome. A righteous dude.
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That is like asking will it snow in the future?
Yes, it will snow. Mostly in the winter, but sometimes in the fall, and once in a while in the spring, and sometimes a day or two in the summer.
But it will melt fast.
And we will get less snow than last year, so don't buy a new snowshovel. The old one will do. And keep the snowblower you have. Repairing it is cheaper and you don't need the new one with the higher horsepower with these levels anyway.
Gold will fluctuate. It isn't going to 200, 300 or 400 anytime soon.
You must remember that the price is controlled to a degree by traders who don't report to any government aggregation according to laws or regulations. They can have as little or as much on hand as they want. They can manipulate the price and since they often are government controlled central banks, if they let an employee work in such a manner that he over sells, or shorts an account illegally, in an under-the-table-policy, by telling a co-worker to tell him that it is OK as long as he does not get caught, they can blame it on him. The errant employee who was caught in a copper trading scam in the nineties at Barclay's bank could have been operation on bank encouragement if not on direct orders.
It's only a scam if he loses money. They might have in some case paid an employee 3 or 4 million to say it was his fault and take a light prison sentence if he returns confesses, and deposes completely. Would you do 4 years in a country club prison with time off for good behaviour (2 years) if you lost investor's 3 billion by bad trading practices your boss encouraged you to do, -and- they paid you 4 million to take the fall? After all ALL employees of large banks are employees. They may run the place, but they don't own it. And if they are ALL in on a scam, they usually don't want to admit it. It's like crooked cops.
But is this huge metals bubble a bubble or genuine supply and demand. Are the rumours of widespread substitution true? Will prices decline?
Well, since some portion of the supply and demand is partially a cartel/LME created thing, to a degree it could be driven down and that degree is the degree to which the LME control prices. In copper, Tin, and a few other metals, it used to be 100%. Now this is not so. Chinese traders by their buying power set the price. And the copper use "policy". So in theory if they wanted to, they could drive the price up or down. Of what they buy and that is everything. Where we use the most of the thing, which is nothing except maybe nickel, and to an extent Pt, then we can rig the price except where there is none, like Rh and it is very desirable. So occasionally until supply comes on stream we jack prices. This is because in a widespread commodity it benefits the seller and the seller(s) controls prices. Where the seller is one or very few people, they co-operate with buyers at a median price, which often is lower to keep the competition out. These are stable levels, based on long term installations and do not get inflation adjusted. Case in point, Inco and gold.
Governments co -operated widely to reduce the price of gold in the late nineties. they did so not because gold was a relic but because the tech boom was thought to be real, or advantageous at least and dumping gold and buying paper looked good. It was good until they had to admit they sold the massively hedged gold. Thehedged sold gold could no longer support the large price drop as the overhang of its derivatives which keep the price low (sale of calls, and buying of puts) could not be supported. 75% of gold price is supply and demand driven, as 75% of gold is NOT sold to central banks, but jewellers and end users!!! So when mines do not supply the price could go up over time. Sales drop as the price for short selling purposes goes down, so margins are lower, and it is not as attractive to buy the paper when the market tanks. The marginal demand for borrowing gold puts a slight short term pressure on the price, so the price seems to fluctuate with the stock market levels. But in fact it is not long term. Gold price rises in conjunction with stable or low priced market for stock, and higher prices for oil and lower value for paper money, or higher market prices for goods.
This will continue for the next ten years. So higher than 350 dollar gold is guaranteed. Higher than 450 is likely and higher than 550 is a good bet. So production is favoured.
My thinking is gold will stay above 650 for a while. Maybe 3 or 4 years. If you look at the curve of sure steady price rise, it is not short. It has legs 8 years long in fact.
The borrowing mines do to mine gold has a tendency to drive the price of gold down as it's a "naked short". Shorts depress prices. The largest borrower of gold would be the major mining companies. Barrick, Newmont and Harmony whose cash needs to develop force them at low gold prices to 'loan gold' in order to get the cash to mine it. This forces the buyer to sell that same gold; dumping excess (double the gold) on the market creating the price drop.
As long as gold is dropping and the seller has puts and has sold calls into the market, AND the miner has a favourable contract to deliver the gold at X price which he adjusts for higher prices; the gold traders, who loan money to the mines in return for a "loan of gold" to himself by the miner, shorts the gold while it drops -- and game continues. This explains why Barrick was most profitable as a company when the price of gold was $250.00 an ounce. They stopped being profitable when the price started to rise. It was a short squeeze. The world's largest short squeeze. Strangely, some of the holders of gold almost went bankrupt. They could not deliver on their shorts as they could no longer get the money to deliver gold to mine. They were shorting gold by selling it forward, and they could not turn around and deliver when the loans were called - that is when the price rose.
Will gold drop in price? If they go back to banks divesting gold to buy paper, AND companies selling gold they have not yet mined to mine gold at lower and lower prices.. then they price may drop. But can it drop to record lows? Hard to say. The last record low price drop before 1998 was 1922. Nobody was borrowing gold or selling gold forward at that time, but it dropped to an identical price of 1998. Why? Probably because the market was at an all time high. This was 7 years before the stock market crash. The analysis of the forces on gold as an investment in 1922 is very important. In that time the world was coming out of war, and the price of gold was fixed by the gold standard. However, post war inflation in the 1920's with a more or less depressed by gold standard tactics conspired to drop the RELATIVE price. Gold was worth 30 plus dollars but it was held to 22 by countries who were anxious to repay war debts, with stable gold and dollar rates. So they held the price down. If the price of gold rose, then the gold rich nations could not afford it to repay debts or would be subject to massive ruinous inflation. They were on the gold standard of monetary exchange.
After the 1914-1918 war, the inflation in the US dollar which set the price of gold was hidden as MOST inflation in the dollar, created by massive US printing was protected by the fact that the US dollar was the preferred medium of exchange not and ounce of gold as it was BEFORE 1934. In 1930's Roosevelt went OFF the gold standard and gold floated up in price. Roosevelt let it, but was anxious to preserve the price of the buck in gold, as most nations still proffered gold for trade, and the US buck could get bought out cheaply. He then fixed the exchange rate for gold at the price it was in 1934 which co-incidentally was 35 dollars. It had got there on its own. It was not pegged arbitrarily at that price as many believe. |
