I believe that their are a more than a few "rogue" fund managers who are and have been for some time long gold in speculative plays. However the overwhelming short position ( some say 8-9000 tons ) has been built up for a reason a little different than pure speculation, although there are elements of this attached.

These hedge funds have been using gold as money, i.e. capital, for other more speculative plays and generally lubricating the world's economies, ergo our boom.

However they have just figured out...hey gold is real money, we can't just create this stuff out of thin air, like yen or dollars. When the time comes to pay the piper somebody is gonna want real gold, that's what they have bought. The derivatives game with gold is not just like any other currency because it exists beyond the behest of government will.

If the hedge funds that are short ( read banks ) let gold get out of the cage it is curtains for them all. The derivatives unwind on gold will be so massive and sudden that the futures market in the precious metals will fold overnight locking many would be players out. It will never re-open.

The folly of using a physical commodity as a source of liquidity to arbitrage against other speculative plays is now plain for all to see, Nobel laureates can now even figure this lunacy out, from experience.

So you see the problem is there is no large volume of gold to be had at these prices, it is a false market. The few scraps that are being thrown to us lucky bugs keeps the lions at bay, if the funds that are now short would be asked to deliver this gold by a large specultive longs it would not happen, the market would collapse. So why go long into a collapsing market, you will never find a party to honour your "winning bet" on the other side?

This is why it is a rigged game and no hedge fund in their right mind will go long gold, however the hedge fund managers may just be stacking away a few bars in their back closets. This is the apalling situation in the gold market at present. The western banking system has been doomed by the negilence of central bankers in the guardianship of the national treasures, especially gold, and they will pay the ultimate price.

Any comments on this analysis or am I in cloud cuckoo land? Should I not bother with gold call options in mid to late '99 at $360-380, in favor of just buying physical now? Aye-yi-yi my brain hurts!

Thanks, Andy

-- Andy (andy_rowland@msn.com), November 08, 1998

Answers

Andy,

The deliberate attempts to demonetize gold (and recreate it as a mere commodity) over the past few decades have gone quite a long way with the bulk of the world's population who never have seen gold used as money. These central bank/ governmental efforts to change the outlook on gold might have succeeded if the game could have been carried on for one more generation. Unfortunately (for the CBs anyway) it all seems about to come down in a heap.

The announced backing of the soon-to-appear Euro by 15% gold is the first chink in the wall. Russia's threat to begin minting gold roubles is another. The rumored discussions of a partially gold backed yen to compete with the Euro and likewise rumored discussions of a Middle Eastern gold- backed currency are more indicators. Finally, the staggering increase in sales of bullion coins in the US indicate that the gold bug is catching in a huge way this year. And the idea of gold as the ultimate store of wealth seems to be reemerging from the paper madness of the last two decades. It's enough to make a goldbug proud, even in the face of an apparently manipulated market that is bent on propping up the DJIA and holding down gold.

I don't think you can afford NOT to own at least one option in the 4th quarter of '99. True, you might never see it pay off. But you might... . Yet playing the speculative market is no substitute whatsoever for owning physical product. So as not to get yelled at I will go through the usual disclaimer that before you worry about filthy lucre you take care of the other physical essentials (safe shelter, heat, water, food etc) first. But once the dreary necessities are taken care of then you can get to the really fun stuff. Lay in insurance positions in physical silver first, then small denomination or fractional ounce gold. When an adequate physical position is established (your call what's adequate) then go on to paper- consider mining stocks, mutual funds (Central Fund Canada, Midas Fund, Gabelli Gold etc) as well as options. I figure that if there happens to be profit potential I'll dump the paper positions for profit and hang on to the physical. If not, hey, it was worth a shot. My guess is that the paper may pay off soon enough to allow some conversion to physical at good prices- but I have enough physical to be happy either way, right now. Isn't it NICE to have your bullion purchases subsidized by the central bankers?? And your brain doesn't hurt if you diversify- least mine doesn't (but even my friends say, "WHAT brain?").

nemo...

-- nemo (nemo@deepsix.com), November 08, 1998.

Go for the physical, not paper. We have no solid idea of what gold is worth because the gold market is being manipulated to the down side. Any future paper position based upon cycles, forecasts, or futures is speculation as the base line is contaminated. It isn't a free market and hasn't been for some time.

mitch

-- Mitchell Barnes (spanda@inreach.com), November 08, 1998.

Go physical and be happy. Speculation requires a working telecomm and computer sytem(s). Wouldn't be surprised if the futures market gets "frozen" 4Q 99.

-- R. D..Herring (drherr@erols.com), November 08, 1998.