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May 3 - Gold $387.40 up 60 cents - Silver $6.01 down 4 cents
The Gold/Silver Trade Is A Buffet-like One
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Our greatest glory consists not of never falling, but in rising every time we fall...Oliver Goldsmith
GO GATA!
Shake your head time. The news over the past few days concerning Iraq is just horrendous. Nine more dead this weekend, apparent total confusion in Fallujah, and the further airing of the US torture, Iraqi humiliation pictures has done permanent Muslim-related harm which will last a decade. The worst part is the damage is done and cannot be undone, especially since the US sat on this for months. Air Force Gen. Richard Myers, chairman of the Joint Chiefs of Staff, had the gall to say over the weekend he had not even read the report on this mess yet. Are they sending it by Pony Express? Now more disturbing news comes out this afternoon about how the US has handled this disgrace:
BAGHDAD (AFP) - Former Iraqi human rights minister Abdel Basset Turki said US overseer Paul Bremer knew in November that Iraqi prisoners were being abused in US detention centres.
"In November I talked to Mr Bremer about human rights violations in general and in jails in particular. He listened but there was no answer. At the first meeting, I asked to be allowed to visit the security prisoners, but I failed," Turki told AFP on Monday.
"I told him the news. He didn't take care about the information I gave him." The coalition had no immediate comment about Turki's meeting with Bremer.
The minister, whose resignation was formally accepted by the coalition on Sunday, said he told Bremer about his meetings with former detainees.
"The prisoners I spoke to, they told me about how Iraqi prisoners were left in the sun on US bases for hours, prevented to pray and wash and left for two days on a chair and kicked at Abu Gharib," he said.
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The ramifications for US financial markets are profound, yet Wall Street and the investing public do not seem to care. The DOW rose 88 to 10,314 and the DOG jumped 19 to 1038. The dollar went up .34 to 91.02, as did the bonds, up 3/32. Meanwhile, the sillies on Wall Street are more concerned with the Fed taking a virtually meaningless word like "patient" out of its statement tomorrow. Rome is burning and Wall Street is focused on a word. For the most part the Fed is very predictable. Just take a consensus on what the investment/commercial banks want to hear on Wall Street and you generally know what the Fed is going to say. What these "Lolas" want, these "Lolas" usually get. Anything to soothe the major financial market players.
Oil is one market which is paying attention to the latest Mid East developments as crude ended up in contract high ground at $38.21 per barrel, up 83 cents, a 13-year high close.
Considering what is going on in the world, gold should be flying, which is just the reason The Gold Cartel is sitting on it (Goldman Sachs sold again today early on), which, in turn, drew in more fund selling (later in the day).
June crude oil daily:
http://futures.tradingcharts.com/chart/CO/64
Technically, oil is set to explode.
Oil monthly
http://futures.tradingcharts.com/chart/CO/M
The CRB rose 2.72 to 275.26.
The euro fell .24 to 119.26.
The gold open interest fell 1444 contracts to 245,872.
Silver dropped another 22 cents early, stopping exactly at its 200-day moving average, suffering from another bout of spec liquidation, then crawled its way back to finish above $6.
The silver open interest fell 3840 to 97,865..
There were 684 more silver deliveries. Am still scouting around in attempt to determine what this really means.
The volume today in both and silver was extremely light as many in the gold world were off for a May Day holiday.
News from overseas continues to be very positive as gold demand continues to surge in many circles.
MIDAS SPECIAL:
In early 2000 Warren Buffet was criticized by a number of pundits as having lost his touch because he was not participating in the Nasdaq mania. Less than two years later, after the DOG had collapsed, he was extolled for his acumen. A few weeks ago with the stock market riding high, I noticed vestiges of the same sort of commentary about his short dollar position as the dollar was in strong recovery mode. Commentary by a bunch of lightweights never phased this investing genius. At his annual convention this Saturday Buffet announced, not only was he not backing away from his short dollar bet, he was increasing it:
May 1 (Bloomberg) -- Billionaire investor Warren Buffett said he increased his bet against the U.S. dollar on concern that the country's trade deficit will weaken the currency.
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``We think that over time that the dollar is likely to decline in value against some of the major currencies,'' said Buffett, 73, in an interview before Berkshire Hathaway Inc.'s annual shareholder meeting in Omaha, Nebraska. In the last few months, Berkshire has added ``
more than a little bit'' to its foreign currency holdings, he said. They were last disclosed at $12 billion as of yearend.
Foreign currencies represent Buffett's biggest purchase in the last two years. The Berkshire chairman has built a fortune buying undervalued assets and today sees little opportunity in stocks. He bought currencies as the dollar began a 25 percent slump over 24 months and the U.S. current- account deficit ballooned to a record quarterly average of $137.7 billion in the first nine months of 2003.
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The man is worth $42 billion dollars and has made this incredible fortune by doing his homework and understanding the fundamentals of what was really going on in the investment world. He doesn’t pay attention to the Wall Street hype and posturing. Once he figures out what "the deal is" through his own (and staff’s) evaluation, he makes a bet and stays with that bet until it works out. He might even add to that bet as he has just done in currencies. What is important, as far as I am concerned, is that he usually stays with his investment until it plays itself out. As we have learned from his record, that might take many years.
This is the approach I have advocated for gold and silver investments since The Café opened in September of 1998, the Buffet approach. From the dog days going into 2002 until the heights of December 2003, I probably ran up unrealized gains of say 1000%. During the last four months 40% of those gains have been given back, painful but not devastating by any means. From these levels on in, I will be shocked if the 1000% gain mark is not exceeded by this fall and does not rise to a total gain of 3,000 % some time by the end of 2005.
The point is times like these are very tough to go through, but necessary along the way to eventually get to that 3,000% gain number. For those who can successfully get in and out during the move, my hats off to you. Surely, in retrospect, it was the right thing to have exited gold/silver plays last December, but there will come another time when gold/silver will begin to dip again, look like this last correction, and then explode, never to look back for more than a decade. Those who stepped aside at that time are likely to miss the most dramatic part of the move and the easiest money of all as the public pours in to buy up this little market.
Getting back to Buffet and his type of analysis. Let us review where we are here regarding gold as far as the big picture is concerned, a picture which is rarely talked about.
Most of the investing world believes the central banks still have 32,000 tonnes of gold. That is the most bandied about number we hear of from commentators. Yet, we know The Gold Cartel and other bullion dealers have surreptitiously squandered 16,000+ tonnes of that gold via various gold lending/swapping operations. This exited gold was used to suppress the gold price since the mid-1990’s. Meanwhile, the IMF has instructed its member banks to hide this fact from the investing public by instructing central banks to show this lent/swapped gold as actual gold reserves on their books. This is the dirty little secret The Gold Cartel doesn’t want the public to know.
Yes, the number could be 17,500 tonnes by now (we have been using 16,000 tonnes as a high estimate for more than a year), however, 16,000 tonnes is a more conservative way to go for this exercise.
This means the central banks only have 16,000 tonnes of gold left. Of that 16,000:
*The US has 8,000 tonnes and says none of it has been lent or swapped. This is highly debatable, but will take US officials at their word for the moment.
*The IMF has 3,000 tonnes. It too says it is all there and it would require an Act of Congress for the IMF to sell any. The last time they suggested IMF gold be sold, it activated all kinds of Republican and Democratic leaders in Congress to go against the proposal.
*The Swiss say they will not sell their last 1700 tonnes once they finish their recent selling bout.
*The French have 3000 tonnes, and while their have been some noises lately about their doing some selling, it is not very likely, and if they do, it won’t be that much.
Add that up and you come to 15,700 tonnes. If the above facts are all true, it would suggest The Gold Cartel is about to hit the wall. It means all the other central banks have already lent or sold all their gold like the Canadians, Norwegians, Australians. We know that is not the case, so it strongly suggests the US or IMF has had its hand in the lending pool. However, this is not critical as to where I am headed with this.
The yearly supply demand deficit is probably running between 1400 tonnes and 1700 tonnes per year, meaning gold demand exceeds mine and scrap supply by that amount. At that rate the central banks would run out of gold in around ten years. We know this will not happen. What it does tell us is The Gold Cartel must very nervous about the size of the growing gold short position with the realization it is going to have to be accounted for in the near future.
Since it is a virtual impossibility other central banks have sold/lent/swapped all but 300 tonnes of gold, it most likely means the US or the IMF is lying about their gold mobilizations.
It also suggests The Gold Cartel must realize they cannot carry on their scheme much longer. The stakes have become too great, the risks too high. At some point this is going to become known to more and more investors, as well as to governments, and The Gold Cartel will not be able to hold the price down as a gold buying panic sets in.
Thus, the pertinent question is not where the gold price is going, but how soon? I suspect it is sooner than most people think and this latest move down was orchestrated by the cabal with this in mind. For The Gold Cartel and others to even begin to cover some of their shorts, they needed to get the specs out of their long positions and turn a number of them bearish, which is just what they have done.
To take this a little further, I bring your attention to part of a presentation Frank Veneroso made to the GATA African Gold Summit on May 10, 2001 in Durban, South Africa. James Turk, Reg Howe and I also made presentations. At the time gold was $265 per ounce and Silver $4.35 per ounce….
http://www.lemetropolecafe.com/pfv.cfm?pfvID=1525
Now, in addition to the above three corroborative bodies of evidence we did a little bit of field research---we have had other people make inquiries with bullion bankers. (We went to other parties to make the inquires, since we feared that, as analysts, these dealers would be less forthcoming with us.) Some of these bankers had left bullion banking, some had been fired and felt disaffected and inclined to speak, some are still employed. In any case, they were willing to talk. We have gotten, albeit crude, estimates of gold borrowings from the official sector from about 1/3 to 1/4 of all the bullion banks. We went to bullion dealers and we asked, "Are these guys major bullion bankers, medium bullion bankers, or small scale bullion bankers?" We classified them accordingly and from that we have extrapolated a total amount of gold lending from our sample. That exercise has pointed to exactly the same conclusion as all of our other evidence and inference---i.e. something like 10,000 to 15,000 tonnes of borrowed gold.
So I have now given you 6 completely independent pieces of evidence that a hell of a lot more gold has left those official vaults than the consensus would contend. This implies that the flow, the draw down rate, the liquidation rate from official gold stocks is substantially higher than what the consensus contends.
Now let us put these two suppositions together. Remember our pie chart--- a big chunk of the official gold reserves reported to the IMF has already gone. Remember our supply/demand balances---this outflow on an annual basis is substantially larger. Now, let us project forward. First of all, as the years pass, global income will rise. At a constant real gold price we could then expect demand would rise somewhat. At the same time the current very low gold price is close to the total cost of production and we are having less exploration. We have more or less exhausted the pipeline of projects that we created through higher exploration expenditures years ago. Also, cash flow strapped miners are high grading the eyes out of their mines. Mines deplete in any case by about 7% a year. Mines are depleting more rapidly now because miners are high grading. In essence, we are not coming up with new projects to replace what is being depleted, and depletion is occurring at a rapid rate. Overall we can expect mine output will fall over time. Therefore, we can assume some growth in future demand, we can assume some decline in supply, so that the deficit in the gold market---that rate of flow of gold out of the central bank vaults---should increase in order for the gold price to remain at its current level in real terms.
Now, we will make two sets of assumptions. First let us take the current rate of drawdown and project it forward. Second, let us also assume some growth in that rate of drawdown. Let us then take our estimates of what is left in them thar' vaults and figure out how long this process can go on.
First, we take our conservative numbers--- our lower rather than our higher estimates of gold lending. Here we project how long this process can go on if we assume no growth in demand and no decline in supply and conclude it will take a decade to empty the vaults. In this alternative projection we have assumed some growth in demand and some decline in supply. It will take about 7 years to empty the vaults.
If we use our more aggressive numbers, we have less in those vaults and it is flowing out at a faster rate; consequently, it takes less than seven years to empty the vaults. So whatever is happening in the gold market--- whatever is keeping the gold price down---if our numbers are correct, it can't go on that much longer, because we know not every central bank will lend or sell all it's gold. In fact, if our analysis is correct, the official sector knows what is coming. If the official sector is rational, it knows what will happen to the gold price when this large flow that is depressing the price abates and ultimately ends---the price will go up by a lot. Therefore, some rational central banks will not sell and lend down to the last ounce. Instead they will start to buy.
So regardless of what has been happening in the gold market, if our data is correct, then, within a couple of years, whatever the official sector is doing, it will terminate and the gold price will rise.
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WHICH, is just what the gold price has done the past three years. Now keep in mind Frank’s 10,000 to 15,000 gold loan numbers are THREE years old. At 1100 tonnes per year of new lending plus 400 tonnes of CB gold sales under the Washington Agreement to meet the supply/demand deficit, his numbers come up to 14,500 to 19,500. (The sales are compiled as loans for this exercise. Interestingly enough, 2000 tonnes of gold will have been sold under the Washington Agreement by September of this year. Anyone notice an official reduction of how much gold the central banks still have? I haven’t.) Now let us subtract a guesstimate of 1500 tonnes of gold producer short covering (thereby ending their loans) and we come up with 13,000 to 18,000 tonnes of gold loans still on the books. Cut it down the middle and we come back close to 16,000 tonnes again.
Three years ago Frank gave the central banks 7 to 10 years to empty their vaults. Now we are down to 4 to 7 years. Yet we know from what I presented above, this is not going to happen. We are not going to get close to emptying the vaults.
Therefore, I am thinking more and more this is The Gold Cartel’s last hurrah. As soon as they think they have done what they felt they had to do in this orchestrated attack, they ought to cover what they can with abandon and we should have a stunning gold rally which would shock most market participants.
What could be a better time than in the coming weeks? The specs have just pared 100,000 contracts from their long positions. Next Friday’s COT report should show them having parted with another 20,000 to 30,000 contracts. The gold market commentators (in toto) are about as bearish as they have been in many years. The physical gold market is VERY strong and the gold fundamentals are "10+++."
And, the run-up in silver from the mid $4’s to $8.46 was not for nothing. A market which has been comatose for many years does not run like silver did for many months into 17-year highs without some strong fundamental basis behind it. Clearly the price manipulators held the fort, capped the price on the way up and waited for the signal from others in The Gold Cartel to make their move to trash it. However, the run-up was a sign cabal forces have begun to lose control of silver because they are running out of physical supply. They won the recent skirmish, but if all the information is as right on the money, as I think it is, it won’t be long before the cabal is backpedaling once again IF they attempt to repeat their price control maneuvers. As it was earlier this year, a rising silver price makes it much more difficult for The Gold Cartel to control the gold price.
Back to Mr. Buffet again. The big gold picture play is just as powerful as it was months ago. We have gone through a trying correction, which should be playing itself out. After it does, gold should set its sights on taking out $430 on its way to $500. Those who trade this play like Buffet would are likely to be very happy campers by year-end and in the years to come.
