Who's selling gold?

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SamLinder's picture
SamLinder
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Who's selling gold?

I originally posted this in the "Late gold rally, New Year's Eve" thread but fear it may have been lost in all the "noise".

I think this is a real valid question and would be very interested in what other members think.

You know, with everybody supposedly buying gold - you have to wonder
who is selling it and what they think the future holds. After all, what
are people using to buy gold - Fiat Currency. If fiat currency is
supposedly going to be no good, then why would holders of gold
(something which purportedly has value) exchange it for something that
purportedly is going to have little or no value (i.e. fiat currency)?

Would some enlightened soul out there please explain this one to me? My head hurts from all his stuff. Yell (ouch!)

 

Farmer Brown's picture
Farmer Brown
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Re: Who's selling gold?

Sellers of Gold:

1)  People who bought in early, can pocket a nice profit, and don't believe there is a big upside to maintaining their position.

2)  People who need to liquidate in order to raise cash and pay off other debts or make investments necessary for the continuation or expansion of their business.

3)  Gold miners

4)  Over-leveraged hedge funds (might be a subcategory of #2) and other institutions. 

I am sure there are a lot more - there cannot be a buyer without a seller!

 

SamLinder's picture
SamLinder
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Re: Who's selling gold?

Patrick,

All the folks you mentioned are still exchanging something of value (gold) for something which many believe will become worthless (fiat currency) in the near future. Either they are all very dumb or they know something the rest of us don't.

Is it possible that the existing fiat currency will be exchanged for a new currency so that people don't lose money? E.g. those of us who have our retirement money in bank CD's.

Years ago when I served in the US Air Force overseas, the military would periodically exchange new "script" for old "script" to keep counterfeiting at bay. The exchange could only be done on the military bases so any civilians off-base that held the old "script" would be out of luck.

Logically, it doesn't make sense for holders of gold to sell it for pieces of paper (FRN's). There has to be something more to this than I'm seeing.

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Gaborzol
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Re: Who's selling gold?

On the practical side, BullionDirect (and online company) is, for one. They lately have a smaller selection, but they still have different kinds of selection (for a while they only had 100 ounce bars in gold:-). I have ordered from them a few times and so far I always got what I ordered, including just a bit over a month ago.

Gábor

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wdstk46
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Re: Who's selling gold?

Actually, it doesn't take lots of selling to drive the price down, just a lack of buying.  For example, if gold is at $1000 and one person tries to sell at that price and finds only one offer at $800, that's the new quoted price!  

While the coin market has been hot, jewelry sales (the bulk of gold transactions) are well off their former pace and even futures buying (and selling) has been down strongly since early last year.  Assets of all type have crashed since the middle of last year and lots of people are running scared.  The dollar has had it's first real rally in years and looks poised to continue.  

These are all short-term issues, not long-term ones, so you need to decide whether you are buying gold for the long-haul or are going to be concerned about all the fluctuations.  Yes, a swing from $1000 to $700 is a heck of a "fluctuation" but it was a short-term move (under a year) and we may have more yet to come.  I wouldn't be surprised to see $700 broken one last time (not a prediction!).

If you believe that the dollar is ultimately headed for a disaster, just buy the dips and enjoy the ride.  Don't forget, for every seller, there is a buyer.  Figure out which ones are the smarter and do what they do.

 

Jim 

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grl
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Re: Who's selling gold?

Sam, I am definitely not enlightened but I do see one flaw in your otherwise logical question - you assume that fiat currency (or just the dollar) will be worthless at some point, and I assume you think that point will be in our lifetimes. If you ask around you will find that most people, even those who know what fiat currency is, will not agree with you. I know that the bullion dealer I deal with laughs off the idea, he has been in the gold biz for many years but he's not a "gold bug." In fact, he thinks that the premiums on physical gold right now are ridiculous and is quite certain they will come down this year. Do I believe the dollar is heading for the gutter? Yes. Do I know that? No. There are many intelligent people out there, some of whom are selling gold, who believe the dollar and other fiat currencies will be with us for many years to come and in fact, even believe the dollar is going to prove to be the strongest one out there. ..... and believe it or not, gold is heading down.

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Farmer Brown
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Re: Who's selling gold?
Quote:

All the folks you mentioned are still exchanging something of value
(gold) for something which many believe will become worthless (fiat
currency) in the near future. Either they are all very dumb or they
know something the rest of us don't.

Is it possible that the existing fiat currency will be exchanged for
a new currency so that people don't lose money? E.g. those of us who
have our retirement money in bank CD's.

Most businesses cannot put their entire holdings in gold.  They need some portion of their reserves in cash to pay salaries, service contracts, buy equipment, pay debts, etc.   Take a school or university, for example:  they receive most of their annual revenue at the beginning of the year, when tuition is paid.  About 80% of that revenue is disbursed throughout the year just in salaries, and another 15% in other expenses.  Hopefully 5% gets saved for capital replacement.  You cannot just have it all in gold and liquidate part of your position every month to meet operating expenses.  

Other businesses or private persons may liquidate gold because they see something more attractive - perhaps property or a business deal, or more likely, because they have to pay down debt.  Granted, right now business investment and equipment aquisition is down, as well as hiring, but these are just some reasons normal, every-day people or businesses, including those who think gold is the way to go, would sell gold.

Others just play the market, selling gold when they think it's near the top of it's current trading range, and buying it at the bottom of what they define as it's trading range. 

Gold miners have to sell to pay salaries and other extraction costs - there's a supply that will always be selling a good protion of their holdings.  Banks may sell to buy dollars, especially right now when dollar outflows from the US have collapsed.  In Costa Rica, where I live, the bank tries to maintain the dollar within a certain range of the local currency, the colon.  Right now, they are facing a dollar-shortage (investment and tourism is down), so the colone is expected to have strong devaluation pressure from the dollar.  If we were a country that had gold reserves (which I am 100% certain that we don't!), we could sell gold to raise dollars and keep our currency from depreciating.   I am sure the geniuses at the central bank here will instead print more colones and use them to buy the dollars they think they need.

 In short, the market is full of all sorts of different players facing different short-term and long-term pressures and goals.  If it didn't, there wouldn't be much of a market for anything at all.

 

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Re: Who's selling gold?

Couple of interesting articles from Seeking Alpha.com posted previously by pinecarr.  There's some great topical discussion in the following thread:  http://www.peakprosperity.com/forum/gulf-countries-including-saudi-arabia-approve-new-currency/11066

Apologies if duped here. 

Is it too far fetched to see a direct line being drawn from oil to gold and the oil to dollar line slowly being erased?  Some pretty serious implications if oil is priced by gold instead of the dollar.  Can the end of the dollar as the reserve currency be too far behind?  Anyone else think this is yet another domino to fall signifying the end of the dollar?

I think it is an interesting premise that 'someone' is selling gold and accepting fiat currencies in exchange.  I would have to go with SamLinder's assessment that "they are all very dumb" over "they know something we don't know".  As long as they're selling it, I'm buying it.

 Seems like it's more important to ask "Who's buying gold?" 

________________________________________________________________ 

"Everyone knows something you do not.  Learn from them."     Sifu Bruce Lee

________________________________________________________________

 

Will the New GCC Single Currency Include Gold?

by: Peter Cooper December 31, 2008 | http://seekingalpha.com/article/112731-will-the-new-gcc-single-currency-include-gold

 

Gulf Cooperation Council leaders yesterday concluded their 29th annual summit meeting in Muscat, Oman with a final approval for the creation of a single currency for the six-nation economic bloc, still targeted for 2010.

Saudi Arabia is the largest economy in the GCC and boasts substantial gold reserves. But whether gold will be included in the currency basket has not yet been decided.

Golden opportunity

GCC assistant secretary-general Mohammad Al Mazroui told Gulf News: ‘We first have to decide on the location of the Central Bank, then the Central Bank and Monetary Council will have to decide on the gold reserves for the Central Bank’.

The creation of the GCC single currency - likely to be known as the Khaleeji which means Gulf in Arabic - is a major gold event for two reasons.

First, the breaking of their dollar pegs by the Gulf Arab nations is clearly dollar negative. Secondly, any inclusion of gold either as a part of the monetary basket, or in the reserves of the new GCC Central Bank will create additional demand for the precious metal.

2009 deadline

The project is gathering pace, and no lesser a figure than Saudi Arabia’s King Abdullah has directed that GCC economic integration committees speed up their work and complete the whole exercise by September 2009.

It is only a couple of months since a group of Saudi businessmen allegedly bought $3.5 billion worth of gold, believed to be the largest ever single transaction for the precious metal. Perhaps in 2009 it will be gold rather than local currencies which become of interest to speculators about monetary reform in the GCC.

Gulf countries are keen to break away from the link with the US dollar because it ties them to inappropriate monetary policies that exaggerate the boom-to-bust cycle in their economies.

From "The Gold to Oil Ratio Does Matter" http://seekingalpha.com/article/112653-the-gold-to-oil-ratio-does-matter

Seasonally, oil (USO) is extremely weak from October through December. In 2008 oil started October at about $100 and ended December around $40 or around a monstrous 60% decline. Oil is strongest seasonally from July through September with the strongest individual months being January and August. Oil’s 200dma sits right around $100, appears to have hit around its bottom and the 200dma is exerting a gravitational like effect pulling oil prices up.

By contrast gold’s 200dma is at about $860 per ounce. Gold (GLD) has recently passed through its strongest seasonal period from September to December. It maintains the uptrend from January to March, is asleep the rest of the year except for a strong rally in May. While seasonality is helpful, it does not etch the future in bullion and this year has been different.

The recent financial turmoil has caused tremendous technical damage to gold almost as if it was done intentionally to stunt its bull market during all of the financial carnage. GATA asserts that when the news is really bad gold goes down. Well, the last half of 2008, when gold should have performed well seasonally, it swooned from over $1,000 per ounce to the $680’s while Lehman Brothers (LEHMQ.PK) evaporated, Fannie (FNM) and Freddie (FRE) were nationalized and bailouts were served every night on the news. Such suppression has only wound the spring that much tighter.

 

 

It is important to keep in mind that both of these commodities are still in strong secular bull markets. The FRN$ is in a strong secular bear market as is the DOW and real estate. The Gold/Oil ratio is now about 23 barrels of oil per ounce of gold. The 200dma is about 9.5 and the historic average is around 15.

The extremes happened in 1974, 1986 and 1988 as the ratio approached 30 and 1977, 2001, 2008 at about 8 and 2006 at around 6. For these relative prices to return to more normal ratios something is going to give. Oil is either going to go up, gold is going to go down or to move into some sneaky calculus the rate of oil’s rise will be faster than gold’s. The silver (SLV) to oil ratio is not nearly as extreme as gold to oil but silver will most likely follow gold, either up or down, at a faster rate of change.

This is where geo-politics arrives. Are the oil producers willing to take so little value in exchange for their precious black gold? With Peak Oil (mp3) asserting itself the oil producers should hold the bargaining power. The latest IEA numbers indicate an extremely serious steeper than expected 9.1% decline rate. Yes, the Canadian Oil Trusts will rise in value as a safe, secure and stable source of oil. But perhaps the oil exporters should sit on their oil and let the importers roil and writhe in pain as E. M. Forster’s 1909 essay The Machine Stops is played out. After all, a barrel in the future will be worth more than a barrel today. Obviously, the collapse will not be televised.

At all times and in all circumstances gold remains money. It is the most powerful currency in the world. Oil is the world’s primary energy source which is why the gold to oil ratio is important. Gold is the most effective tool humans have to perform mental calculations of value. By analogy it is the tool used to determine how many calories an apple provides and how many calories it takes to collect and process the apple so it can be eaten.

Producing gold is essentially converting energy into bullion. How many calories go into producing a one ounce gold coin? In some cases to produce a single ounce hundreds of tons of rock are moved. Ultimately, money is about energy. To make it personal, how much value should you put on that nice steak dinner, bottle of water from Fiji or 3,000 mile Ceaser salad? Well, think through the supply chain and how much energy the good or service represents.

The world has a very serious problem. Because it has used a fiat currency with no definition or basis in reality for nearly 100 years and because oil production was constantly increasing during that time the effects of unwise capital investment were masked. Energy Return On Energy Invested (EROEI) calculations were not even performed. A fiat currency attempts to sustain the unsustainable while a commodity-based currency employs the strict laws of reality to ensure the unsustainable is not encouraged.

In other words, no one knew or calculated either how many calories the apple supplied or how many calories it took to procure and process the apple. The entire infrastructure of the entire world was built using mental calculations of value based on a derivative illusion. As natural and economic law assert reality and gold begins circulating as currency in ordinary daily transactions the distortions will be removed and the gross misallocations of capital will be revealed. I wonder what such a world will look like? Will The Machine Stop?

Disclosures: Long physical gold and no position in GLD, SLV

SamLinder's picture
SamLinder
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Re: Who's selling gold?
Lisa G wrote:

Sam, I am definitely not enlightened but I do see one flaw in your otherwise logical question - you assume that fiat currency (or just the dollar) will be worthless at some point, and I assume you think that point will be in our lifetimes. If you ask around you will find that most people, even those who know what fiat currency is, will not agree with you. I know that the bullion dealer I deal with laughs off the idea, he has been in the gold biz for many years but he's not a "gold bug." In fact, he thinks that the premiums on physical gold right now are ridiculous and is quite certain they will come down this year. Do I believe the dollar is heading for the gutter? Yes. Do I know that? No. There are many intelligent people out there, some of whom are selling gold, who believe the dollar and other fiat currencies will be with us for many years to come and in fact, even believe the dollar is going to prove to be the strongest one out there. ..... and believe it or not, gold is heading down.

Patrick Brown wrote:

In short, the market is full of all sorts of different players facing
different short-term and long-term pressures and goals.  If it didn't,
there wouldn't be much of a market for anything at all.

 

Patrick - I certainly can understand the short term need for fiat
currency to fulfill immediate obligations but my underlying questions
regarding buying/selling gold still remain for the long term. See below.

 

Lisa - Your points are valid and only serve to highlight my confusion on the matter.

Everywhere I turn these days, I see financial sites pushing people to buy gold as if it is the only salvation left on the planet. After a while, I begin to think - wait a minute. If everyone is buying gold, who's selling it - and why? Because, if they're selling gold, they're taking in some form of paper currency which myriad "economists" on these various sites are swearing up and down will be worthless in short order - perhaps even this year. Are they all wrong?

In years past, whenever things around the world have gotten tense (war, recession, etc.), gold has always spiked as a "safe haven". However, this time gold (which slowly increased in price in 2008) seems not to be responding as usual. It almost smacks of "manipulation" in some way although I wouldn't have the faintest idea of how to prove that.

Look at the massive dumping of FRN's into our American economy - and the incoming administration is prepared to dump upwards of $1 trillion more! From where I sit, that's got to lead to inflation, if not hyper-inflation, in short order. Thus, making all those dollars worth much less (if not worthless). Why hasn't gold spiked in relationship to that? It always has in the past.

The fact that your bullion dealer "...thinks that the premiums on physical gold right now are ridiculous and is quite certain they will come down this year." gives me further concern. With the world economy in the tank, war in the middle east, smaller wars all over the world, and world economies projected to get worse, why would the price of gold come down? ("...and believe it or not, gold is heading down.")

Do you see where this train of thought is going? The world no longer seems to be operating as one would expect. Am I the only one that finds this state of affairs somewhat peculiar?

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Fogle
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Don't forget deflation

Maybe it has to do with this scenario:

Banks are not lending. This means deleveraging,
because companies and banks must liquidate to pay of loans. The money
supply contracts. This is because the fractional banking was our
printing press. Loans are new money. No loans, no new money. Loans
payed of is money contraction.

This means deflation. Money get worth more per unit.
Prices fall, also gold.

What if major players are selling gold now just to
buy back later. Or selling short.

In a normal recession there is not as much
deleveraging. In a depression there is. The inflation comes after that.  

Just a thought. 

 

On the bright side, maybe we have another great
buying opportunity later this year.

Farmer Brown's picture
Farmer Brown
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Re: Who's selling gold?
Quote:

Everywhere I turn these days, I see financial sites pushing people to
buy gold as if it is the only salvation left on the planet. After a
while, I begin to think - wait a minute. If everyone is buying gold,
who's selling it - and why? Because, if they're selling gold, they're
taking in some form of paper currency which myriad "economists" on
these various sites are swearing up and down will be worthless in short
order - perhaps even this year. Are they all wrong?

In years past, whenever things around the world have gotten tense (war,
recession, etc.), gold has always spiked as a "safe haven". However,
this time gold (which slowly increased in price in 2008) seems not to
be responding as usual. It almost smacks of "manipulation" in some way
although I wouldn't have the faintest idea of how to prove that.

and

Quote:

Maybe it has to do with this scenario:

Banks are not lending. This means deleveraging,
because companies and banks must liquidate to pay of loans. The money
supply contracts. This is because the fractional banking was our
printing press. Loans are new money. No loans, no new money. Loans
payed of is money contraction.

This means deflation. Money get worth more per unit.
Prices fall, also gold.

What if major players are selling gold now just to
buy back later. Or selling short.

In a normal recession there is not as much
deleveraging. In a depression there is. The inflation comes after that

 

I just saw two "experts" on CNBC this afternoon taking each side of the gold question.  I do not see blanket agreement to buy gold.  I do see more people pushing for it now, but certainly there is no consensus.  As for why gold hasn't spiked:  everything else went down 30-50%.  Gold lost what, 8%?  I guess -8% is the "new spike".  Can you point to anything else that held up that well?

One reason it could have gone down is part of what I alluded to:  over-leveraged players being forced to sell.  Imagine you just lost $10 million on Madoff but fortunately you didn't put all your eggs in one basket like other people did and you actually have some gold left - now you have to sell it to meet obligations you were planning on meeting using the phony returns from Madofff's scheme.  The same holds true for many others who lost money, whether in corrupt schemes or legitimate schemes.  They say gold is the "safest" investment - where you put that money for a rainy day.  Well, for a lot of people, it's been pouring.

I agree we may get a bout of deflation and things including gold may go down.  If that's the case, I'll be buying more of it.  I have the long term view that we'll either have serious inflation (best case) or hyperinflation (worst case resulting in a complete currency collapse).  What I don't know is in what month, quarter or even year that's going to happen and I'm not going to waste time or lose sleep trying to figure that out.  I also will not put all my money into gold because I don't know what's going to happen.  The US and other governments have confiscated and made it illegal to own gold before, and I believe strongly in the #1 rule of investing: do not put all your eggs in one basket.

I do not believe it is possible for there to be a massive manipulation scheme or a conspiracy to control the price of gold.  Even if some group was successful at pulling off such a caper without a whistle-blower blowing their cover, there is no way they could do so continually.  It they could, why didn't they put their manipulative genius to work in keeping the credit collapse from happening to begin with?

Anyway, that's my 0.0000238 ozs of gold - I mean 2 cents.

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capesurvivor
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Re: Who's selling gold?

All I can say is that for months my newspapers have been full of huge ads of folks wanting to buy anything that has a whifff of gold, from dental gold to tie tacks. I'm assuming that they are the "smart money" ie. professional sellers/collectables experts/jewelers. 

There is no one advertising gold to sell here, especially coins.

 

SG

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SamLinder
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Re: Who's selling gold?
Patrick Brown wrote:

I just saw two "experts" on CNBC this afternoon taking each side of the gold question.  I do not see blanket agreement to buy gold.  I do see more people pushing for it now, but certainly there is no consensus.  As for why gold hasn't spiked:  everything else went down 30-50%.  Gold lost what, 8%?  I guess -8% is the "new spike".  Can you point to anything else that held up that well?

One reason it could have gone down is part of what I alluded to:  over-leveraged players being forced to sell.  Imagine you just lost $10 million on Madoff but fortunately you didn't put all your eggs in one basket like other people did and you actually have some gold left - now you have to sell it to meet obligations you were planning on meeting using the phony returns from Madofff's scheme.  The same holds true for many others who lost money, whether in corrupt schemes or legitimate schemes.  They say gold is the "safest" investment - where you put that money for a rainy day.  Well, for a lot of people, it's been pouring.

I agree we may get a bout of deflation and things including gold may go down.  If that's the case, I'll be buying more of it.  I have the long term view that we'll either have serious inflation (best case) or hyperinflation (worst case resulting in a complete currency collapse).  What I don't know is in what month, quarter or even year that's going to happen and I'm not going to waste time or lose sleep trying to figure that out.  I also will not put all my money into gold because I don't know what's going to happen.  The US and other governments have confiscated and made it illegal to own gold before, and I believe strongly in the #1 rule of investing: do not put all your eggs in one basket.

I do not believe it is possible for there to be a massive manipulation scheme or a conspiracy to control the price of gold.  Even if some group was successful at pulling off such a caper without a whistle-blower blowing their cover, there is no way they could do so continually.  It they could, why didn't they put their manipulative genius to work in keeping the credit collapse from happening to begin with?

Anyway, that's my 0.0000238 ozs of gold - I mean 2 cents.

Patrick,

I expect that your approach is as logical as any - cover all bases and "do not put all your eggs in one basket."

Very sound advice.

Since I don't have a heck of a lot to work with, I've been trying to second guess what's going to happen but I can see that's really a fool's errand. Plus my retirement money is in IRA's, so I have to consider the tax implications of any move I make. In spite of "Damnthematrix's" attempt to disconnect from the grid, I don't think the tax man will be going anywhere soon!

Thanks for your perspective.

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SamLinder
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Re: Who's selling gold?
capesurvivor wrote:

All I can say is that for months my newspapers have been full of huge ads of folks wanting to buy anything that has a whifff of gold, from dental gold to tie tacks. I'm assuming that they are the "smart money" ie. professional sellers/collectables experts/jewelers. 

There is no one advertising gold to sell here, especially coins.

SG

capesurvivor,

I've seen the same thing here (Oregon) as well as advertising on TV. At the same time I read how we should be buying gold. But no one seems to have any gold coins to sell and I'm certainly not able to buy any large gold bars!

Based on that, it would appear that holding on to any gold that one currently has would seem to be a good idea. Guess we'll hold on to the odds & ends that we have - 'tis better than nothing!

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DrKrbyLuv
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Re: Who's selling gold - me

SamLinder wrote:

I originally posted this in the "Late gold rally, New Year's Eve" thread but fear it may have been lost in all the "noise".

I think this is a real valid question and would be very interested in what other members think.

Sam, you may remember that I responded to your earlier "Late gold rally, New Year's Eve" post by saying:

DrKrbyLuv wrote:
I'm glad that gold passed $880 but the big event with Comex never materialized. I'm sure you followed the story, many said Comex couldn't deliver and that gold would skyrocket (Dec 29-31). This may be part of the reason for the bump...I'm going to sell off some gold as I am holding a high percentage in my portfolio.

Gold is now sitting at around $850 so I don't regret the decision. Gold is a speculative investment and at least with a portion of my holdings, I will continue to sell when it gets close to $900 and buy if it drops to $800 - this simple strategy has worked, but, I may change at any time depending on new developments.

There are several reasons why I am not at all reluctant to sell off gold - and let me first share that I am absolutely not an expert - please take my comments as guesses and not solid advice.

1) I believe that the gold market is manipulated - I can't say how much, but the manipulation is a downward force that seems to hit at intervals.

2) The central banks and IMF hold most of the worlds gold reserves and will use it to keep gold from "breaking out" to protect national currencies - at least through 2009.

3) The dollar looks to be in trouble but; most other currencies seem to be in worse shape which props up the dollar. A strong dollar, usually, but not always, spells a flat or declining gold price. Sam rightfully pointed out earlier that gold, at least temporarily, disconnected from oil and the dollar - so this relationship may be changing.

4) I think deflation will continue - and I don't have a crystal ball - this is a hunch. My logic is that while we are being flooded by liquidity, the subsequent debt and existing interest payments will sop up the liquidity like a dry sponge - at least for awhile.

5) While I've read about gold shortages, I have been able to buy allocated bullion (less than full bars) any time I've wanted - at spot. Hope I'm not making a mistake that could lead to being locked out of the market. 

I would sure appreciate any-one's help in challenging or confirming my strategy or observations - to put it simply - I'm guessing more than knowing! 

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SamLinder
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Re: Who's selling gold - me
DrKrbyLuv wrote:

SamLinder wrote:

I originally posted this in the "Late gold rally, New Year's Eve" thread but fear it may have been lost in all the "noise".

I think this is a real valid question and would be very interested in what other members think.

Sam, you may remember that I responded to your earlier "Late gold rally, New Year's Eve" post by saying:

DrKrbyLuv wrote:
I'm glad that gold passed $880 but the big event with Comex never materialized. I'm sure you followed the story, many said Comex couldn't deliver and that gold would skyrocket (Dec 29-31). This may be part of the reason for the bump...I'm going to sell off some gold as I am holding a high percentage in my portfolio.

Actually, you were responding to "machinehead" in that forum. You were response #1, my response was #14.

DrKrbyLuv wrote:

Gold is now sitting at around $850 so I don't regret the decision. Gold is a speculative investment and at least with a portion of my holdings, I will continue to sell when it gets close to $900 and buy if it drops to $800 - this simple strategy has worked, but, I may change at any time depending on new developments.

There are several reasons why I am not at all reluctant to sell off gold - and let me first share that I am absolutely not an expert - please take my comments as guesses and not solid advice.

1) I believe that the gold market is manipulated - I can't say how much, but the manipulation is a downward force that seems to hit at intervals.

2) The central banks and IMF hold most of the worlds gold reserves and will use it to keep gold from "breaking out" to protect national currencies - at least through 2009.

3) The dollar looks to be in trouble but; most other currencies seem to be in worse shape which props up the dollar. A strong dollar, usually, but not always, spells a flat or declining gold price. Sam rightfully pointed out earlier that gold, at least temporarily, disconnected from oil and the dollar - so this relationship may be changing.

Again, that wasn't me - I tried to find that reference but was unable to, so I don't know who mentioned that.

DrKrbyLuv wrote:

4) I think deflation will continue - and I don't have a crystal ball - this is a hunch. My logic is that while we are being flooded by liquidity, the subsequent debt and existing interest payments will sop up the liquidity like a dry sponge - at least for awhile.

5) While I've read about gold shortages, I have been able to buy allocated bullion (less than full bars) any time I've wanted - at spot. Hope I'm not making a mistake that could lead to being locked out of the market. 

I would sure appreciate any-one's help in challenging or confirming my strategy or observations - to put it simply - I'm guessing more than knowing! 

Your comments are interesting - I especially agree with #1 - and I'm inclined to agree with the rest of them as well. Since I'm not good at reading tea leaves, I guess we'll just have to see what happens down the road.

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DrKrbyLuv
Status: Diamond Member (Offline)
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Posts: 1995
Re: Thanks for setting me straight

Thanks Sam - sorry 'bout the confustion

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Damnthematrix
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Is the Comex Doing Fractional Reserve Delivery of Gold?
Most of the trades on COMEX are just paper transactions,
but as increasing numbers of people think the price of gold
is being artificially suppressed to be held steady in US$,
using gold that doesn't exist and relying on most people accepting paper gold,
there is an increasing number of contracts where the purchaser wants physical delivery.
If enough people demand physical delivery,
there will be an effective run on the bank,
and if they have been inventing gold, COMEX might collapse
leaving gold much stronger and hence the US$ weaker.
If that causes money to leave US bonds and pile into gold,
then the total collapse is imminent.
 
 
05 January 2009

Is the Comex Doing Fractional Reserve Delivery of Gold?


An
acquaintance who works for a small precious metals fund sent this to us
today, asking if we had ever heard of anything like it.

The
short answer is no, but this is not a strong area of specific
expertise, and we never attribute to a bad intent what we can attribute
to sheer incompetency, especially when dealing with large organizations.

When
one is promised specific bars with specific serial numbers of a
specific size and weight one week, and they are not available the next
week when you confirm that you wish to receive them, that brings up the
same kind of red flags that have been so notoriously ignored by
regulatory agencies in other recent cases. Of course the Comex is no
Bernie Madoff.

But nevertheless it does bring into question the
integrity of the Comex records and their contracts, and the condition
of their audits and inventories. We would have a fit if someone did
this to us after an online auction or a personal purchase transaction.
Why should the Comex be allowed to sell what it does not have, and then
dictate new terms after the fact?

And it does put a fresh emphasis on the old adage, "When in doubt, take it out."

We accumulated 3 emini gold contracts on Comex for December delivery and we had been given serial numbers and weights last week for the 3 bars we were to receive.

Today
we are informed that Comex is invoking a rule in which they can deny
delivery of individual mini bars (roughly 33 ounces) and issue you only
a Warehouse Delivery Receipt (WDR) against your mini-contract unless
you have 3 WDR's, and then they'll issue you a 100 oz. bar.

Otherwise, if you have only 1 or 2 mini-contracts,
you only own a WDR, which you sell by shorting a mini against it. If
you own a WDR for a 100 oz., they encourage you to safekeep the gold at
the Comex and hold a vault receipt.

CLEARLY, the Comex has run
out of the bars that were being delivered to holders of emini
contracts. Our back-office guy told us that he's been doing Comex
deliveries for 30 years and he's never seen anything like this, and
he's never heard of this rule on the mini contract. (update: its in the contract if you read it - Jesse)
Fortunately we have 3 WDR's and we will be getting delivery of a 100 oz. Comex gold bar.

But
this whole episode brings into the question the validity of the Comex
gold inventory. More importantly, the Comex is now going to issue
WDR's, which are paper.

Are they becoming a "fractional" reserve
depository, where they can issue several WDR's against the same bar of
gold, knowing that some of those people will opt to keep storage on
Comex and never require actual physical delivery?"

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
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Posts: 1995
Re: Who's selling gold?

Seeking Alpha had an interesting article on the improbability of a Comex default that ran on December 22, 2008 (a week before the heavily speculated failure). It's a long article so here are some excerpts:

Seeking Alpha wrote:

Some speculate that clearing members of the exchanges, who have sold
gold and silver short on the futures market, will eventually be
bankrupted by these delivery demands. According to these skeptics, the
gold and silver consists mostly of fake claims to vaulted supplies that
do not exist. They say that futures contracts are nothing more than
“fake paper gold” and most refuse to buy on the futures markets,
opting, instead, to pay huge premiums at retail gold and silver
dealers. The skeptics may be right about the failure to keep adequate
supplies of vaulted metal, but it doesn’t really matter. If you buy
gold and silver on the futures exchanges, you will get your metal,
whether or not the short sellers are trying to defraud you, and I’ll
now explain why.

The Commodities Futures Trading Commission is charged with the
responsibility to monitor and regulate American futures markets. In
spite of this, the futures markets have morphed from a legitimate place
to hedge the risk of commodities, into a worldwide casino, which has a
gaming commission that claims all of games of chance are really
“investing”. This is nonsense. The exchanges are mostly used as
gambling halls, with banks as casino operators, and speculators serving
in the role of casino guests. All types of bets, from taking odds on
interest rates to taking odds on the volatility of the stock markets
(with no underlying security except the VIX!) are allowed, and are
available to anyone who enjoys games of chance. If the CFTC ever
bothered to enforce its own enabling act, and associated regulations,
most of these games of chance would be quickly closed. For example,
CFTC regulations require 90% of all deliverable commodity contracts
(including gold and silver) to be covered by stockpiles of the real
commodity, and/or real forward contracts from real producers (like
miners). In practice, however, CFTC has never done a spot audit of even
one vault. We really have no idea whether or not short sellers really
have the gold or silver that they claim to have. We can assume that
they probably don’t, given that the number of futures contracts issued
has often exceeded the entire known supply of silver, for example, in
the entire world.

Indeed, in spite of rampant speculation as to
their identity, in truth, we don’t even know who the short sellers are.
Other countries, like Japan, have full disclosure of identities and
positioning, in open and transparent futures markets, but this is not
true of the much larger futures markets based in America. American
futures markets are mostly opaque, because the CFTC keeps the
information secret. Lack of transparency always is a recipe for fraud
and corruption. The likelihood of widespread violations, occurring at
exchanges regulated by CFTC, is very high. Logical people, therefore,
can make some reasonable assumptions. It is quite likely that the
sellers on COMEX do not have 90% of their silver contracts, for
example, backed by stockpiles of the metal.

Yet, adherence to
Federal regulation is an implicit provision in the terms and conditions
of every futures contract. If COMEX and/or NYSE-Liffe short sellers are
entering into naked short contracts, they are violating market rules,
falsely presenting their contracts to the public, and doing all this
with a premeditated intent to defraud buyers. Knowingly making false
assertions and promises is fraud in the inducement. Violation of the
market rules is also “fraud upon the market”, and a federal and state
felony level crime that can result in a long jail sentence. The vast
majority of short positions in gold and silver appear to be held by
only 2 – 3 American banks, so, it would be extraordinarily easy to
pinpoint the perpetrators. Potentially, they could be prosecuted for
market manipulation, common law fraud, state and federal RICO actions,
as well as other counts.

In other words, a large scale default
on COMEX or NYSE-Liffe would not only trigger the paying of money
damages, but would also involve criminal liability. Even if a few
individuals within the federal government are complicit, as has been
alleged, and the U.S. Justice Department refused to prosecute, there
are enough politically ambitious state prosecutors to take up the
baton. Futures market short sellers would pay a heavy price if there
were ever a big default. Because of this, they will spend whatever
money is needed to make sure it never happens.

If a clearing
member of an exchange fails to deliver, the futures exchanges are
legally liable on the debt. If a clearing member goes bankrupt,
performance becomes the obligation of the exchange. If a short position
holder cannot or does not deliver, the exchange must either deliver, or
pay in an amount equal to the difference between the contract price,
and the amount of money needed to buy the physical commodity in the
open market. Generally speaking, contract holders are allowed to
purchase silver or gold on the spot market in a reasonably prompt
manner, and all costs of doing so must be reimbursed.

Contrary
to the claims of some sincere but misguided metal aficionados, while
gold and silver may be occasionally in so called “backwardation”, both
are readily available at the right price. That price, of course, may be
considerably higher than the reported prices on futures markets.
Precious metal will continue to be available so long as the price is
“right”. If short sellers on COMEX are really as naked as some claim,
the only result of technical “default” at the COMEX will be a huge
“short squeeze”, sending precious metals prices to the roof. During
this squeeze, movement of the U.S. dollar, up or down, will be
irrelevant. If delivery demands exceed supplies in futures market
warehouses, metal will be purchased on the spot market. Short sellers
or the exchange will be forced to make good on whatever price is paid.

Here’s how it would work. Let’s say you buy a futures contract for
February delivery of 100 ounces of gold at $800 per ounce in December.
In February, spot gold is selling for $1,000 per ounce, and you deposit
the full cash cost of your futures contract into your account,
instructing your broker to issue a demand for delivery. The
counterparty can’t deliver because the COMEX warehouse runs out of
“registered” metal. There is a huge short squeeze as short sellers run
around the world physical market, trying to buy gold. The short seller
misses the last day to deliver. Because everyone starts hearing about
the missed deliveries, by the next day after the last possible delivery
date, spot gold in London starts selling for $1,359 per ounce. Your
commodities broker must take the money you deposited and buy the
commodity on the spot market for $1,359. The broker will be reimbursed
by the short seller and/or the exchange in the amount of $55,900, plus
any expenses you incurred in buying physical gold on the spot market.
In the end, you get your gold or silver at the price you paid for the
futures contract, regardless of the default.

A number of well
intentioned, but misinformed, precious metal commentators have claimed
that exchanges will escape from this obligation by a declaring a
co-called “force majeure” event. Force majeure is a legal doctrine
which says that compliance with a contract is excused if an “act of
God” makes it impossible to comply. Formal force majeure provisions
exist in many NYMEX contracts, including gas and oil contracts, for
example. After recent hurricanes in Louisiana, a NYMEX committee
declared force majeure, and an extension of time for delivery of
natural gas pursuant to the contracts. Unlike gas, however, which is
produced from the ground, or must be moved long distances under
sometimes difficult conditions, gold and silver are commodities that
normally reside in vaults, and are easily transported. It should be
noted that, as of this date, no formal written force majeure provision
exists in the specifications of COMEX gold and silver contracts.
Admittedly, force majeure is a legal doctrine that is implied in every
contract, and need not be written down. However, higher gold prices
and/or failure to comply with the 90% cover rule are not acts of God and will not excuse contract performance.

The highly leveraged nature of gold and silver futures contracts create
high levels of volatility. That should be kept in mind when you decide
to put a large portion of your investment assets into precious metal.
Big price rises and deep dips are commonplace. Most of these market
movements occur without much regard for the forces of supply and demand
in the real world market. If you need the money tomorrow, steer clear.
But, if you want to preserve your family legacy with something that
will take you safely through depressions and hyperinflations, over
years and decades, gold and silver are good choices.

http://seekingalpha.com/article/111852-will-comex-default-on-gold-and-silver

wdstk46's picture
wdstk46
Status: Bronze Member (Offline)
Joined: Nov 17 2008
Posts: 59
Re: Who's selling gold?

Although I am posting a bit late and this thread may be dead, I can't let it go without a comment.  

I wrote a previous response to a similar article from Seeking Alpha pointing out numerous factual errors so I won't go into that much detail again.   I will repeat one thing that is important.  Well, maybe two.

First off is that the identity of short-sellers standing for delivery are posted daily by the exchange.  I don't know why the author couldn't find their names.  It has been a matter of record since day 1.

Also, the reason you won't see a delivery failure is that the author has everything backward.  Longs don't force shorts to deliver, shorts force longs to take delivery.  When a short seller goes to delivery he has the metal in hand and expects the long to pony up full price.  The short sends a delivery notice to the long.  If a short doesn't intend to deliver, he just closes the contract out ahead of delivery.   It is at that point, before delivery, that you can see a short squeeze.  If prices are soft into delivery, rest assured that there is plenty of metal.

One more thing.  Comparing the futures markets to the coin markets is just silly.  One is bullion and one is manufactured product.  The two are completely separate markets. 

Jim 

 

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