Gold Breakout Delayed
All the conditions were there, a euro currency breakout, a British sterling currency breakout, and pronounced USDollar weakness. The sterling exchange rate even hit $2.00 to capture a tremendous amount of attention. The denials streamed in on how the weaker USDollar is not such a big deal, which always serves as a confirmation of a dire situation. The crippled USDollar cannot buck the passage of time and inexorable destruction through unfettered monetary inflation abuse and colossal irresponsibility. The protection racket actually open the door for executive perks which dwarf whatever was condoned at Tyco with lavish Roman toga parties and gold bathroom fixtures. The world reserve currency is in the process of upchuck rejection.
GOLD SLAMMED BUT FIRM
Anyone wondering why gold has not made new highs during a time when the USDollar is teetering need only look to the official Euro Central Bank gold sales. Thanks to the Gold Anti-Trust Action (GATA) organization for their steady professional reporting on activity behind the scenes. Intrepid Blanchard reports the ECB sold a whopping 76 tonnes of gold bullion in the five weeks ending April 24-th, including 17 tonnes in the fifth week. That is a huge jump over their pattern in the last six months. They clearly waited for a time when the USDollar was exceptionally weak to dump gold. They call it dishoarding, in blatantly irresponsible fashion, since bullion is bank collateral for currency, the banking system, and their economy. These Keystone Gold Cops can only succeed in delaying the inevitable crescendo of a gold breakout. In the process they will destroy their currencys and banking systems. New highs for gold come soon!
In the spring of 2006, when the ECB last dumped a tremendous volume of gold bullion on the market, the gold price fell from $730 to $550. So the resilience of gold is vividly clear, powerfully strong. In the same cited five week time span during the most recent ECB gold dump, gold actually rose from $640 to $690, only to take a hit and find some temporarily stability near $680. When official ECB gold sales abate, look for gold to easily surpass the $700 mark and make new highs. Pressure is relentless and ECB sales will dwindle. Gold will continue to be disgorged from the vaults of these crippled and mindless central banks, intent on supporting an unsustainable fiat system. Experts believe Western banks are underwritten by gold pledges from the US Dept of Treasury in what is called in Orwellian style ‘deep storage gold’ to mean future mine output. But there is much more to the story.
The timing of the ECB gold dump since March is suspicious. Some detective work reveals a couple of significant gold miners covering their hedge books, by whatever means. Coordination with the ECB seems obvious. Without any doubt, a coordination took place between this certain company and Western central banks so as to obstruct any gold rally to new highs. They wanted at all costs to avert a gathering storm for the USDollar, confirmed by a gold price explosion. The ECB has agreed to limit its gold bullion sales to 500 tonnes annually, but experts do NOT expect them to come close to their permitted limit.
Certain large gold mining firms report much higher average cost of mining gold per ounce, compared to just a year ago. Their gold production is down also, as is the entire global gold industry. These large lumbering giants hold back the HUI stock index, since overweighted. They discover next to nothing, gobble up smaller firms, acquire their gold (not discovery), and assume gigantic hedge book losses. In short, they create a false impression for smaller, smarter, more nimble, and less burdened gold miners to invest in. The nightmare for heavily hedged gold miners is not over. They have more to cover on their disastrous hedge books.
INELASTICITY IS HIGHLIGHTED
In a February 2006 article of mine titled “Inelastic Gold Supply” (click here), an attempt was made to explain how gold mine output would not rise in ANY significant way with a higher gold price. Many factors were covered, from hedge books to rising costs to labor shortages. WE ARE SEEING THAT PRECISELY NOW. The recently applied trick for heavily hedged miners is to dilute the stock or to burden the debt load in order to finance the hedge book buybacks. Either way, the stock looks less attractive. If energy firms are not buying back shares instead of investing in their companies, we see gold miners buying back their acidic hedge books instead of investing in their companies. Outcry should be shrill and endless, except that certain gold mining firms answer to central banks, not share holders. And the big energy firms answer perhaps to political leaders. The major point is that higher gold price is NOT resulting in higher gold output. This is the ESSENCE of inelasticity. Large miners testify to the failure to produce greater amount of gold bullion at higher prices.
Numerous points were made in that article of February 2006, each now prominently cited as part of a systemic problem. At the market bottom, enthusiasm with demand was absent, typical of an inelastic system. As the market advances, supply is curiously absent as well, again typical of an inelastic system. Mine output globally for gold was down in 2006, despite a higher gold price.
- Most people are familiar with the basics of the supply & demand curve. Well, except perhaps economists, who re-invent their craft as they go along, fully sacrificing time-tested principles as they "sell out" and defend their interests. Their self-serving analyses disseminated to the public are routine landscape shrubbery. We are often subjected to questionable economist arguments... Whenever a convenient spin is needed on an economic subject, it is alarming how often either supply or demand is ignored, as an oversight (unintended or blatant), or a distortion (accidental or planned) within an argument.
- Don Lindsay, CEO of Teck Cominco, paints a bleak labor picture… Lindsay traced the origins of the labor shortage back to 1997. According to him, the feeder systems were disrupted by the Bre-X scandal, the Asian Meltdown, and the commodity bear market. He expects demand to remain robust from China. Keep in mind that over two thirds of geologists in the world hail from Canadian schools. So if professional shortages exist in Canada, we have a very large problem indeed. Mirroring the crude oil roughneck labor shortage is the mining labor shortage. Another parallel exists. Lindsay points out that within a decade, 60% of all Canadian scientists working the geosciences will be at least 65 years of age. The overall impact is surely that new mine deposits will take longer to find, longer to produce, and cost more.
- Contrast for a moment to the year 2001, when gold was at its bottom $265 price. Nobody could … care less, as financial rags ignored the tremendous bargain, as dealers had to beg customers to purchase the barbarous relic in any form. So at the lowest price, gold went begging with little interest. So at the highest price, gold garnered enormous interest and enthusiasm. That is backwards, grasshopper.
- Let us all rejoice for the screwed up self-destructive overly hedged gold miners. May they enjoy a slow death from a thousand cuts as they endlessly cover their acidic hedge books, and add to relentless demand from their own folly. It is my theory that they will never fully cover such hedge books. They will endlessly purchase, endlessly move their "line in the sand" to incrementally higher price levels, endlessly avert death by buying a little more time.
NEXT: BREAKOUT TOWARD $750
In the next few weeks, gold will cut through the $700 price mark like a quiet hot knife. It would have done so already, if not for the COLLUSION among major governments, their treasury departments, the US Federal Reserve, Western central banks, and key gold mining firms. The Euro Central Bank cannot keep its pace of official gold sales. They will undoubtedly NOT SELL as much as the corrupt Washington Accord dictates as allowable. This is much more destructive than burning the home furniture for winter heat. It is akin to burning the wooden support beams, burning the wooden load bearing pillars, burning the basement den, burning the recreation room, destroying the entire foundation to the home!!! The contractors are the corrupt gold miners who masquerade as miners, but are actually gold cartel agents. Imagine the wisdom of selling off your entire collateral for the currency and banking system, in utter desperation, hopelessness, and anguish!!! Keep up the hedge book covering, guys. We have been counting on you for a couple years. Continue to sop up and exhaust supply, wherever it comes from. BECAUSE WHEN YOU GUYS REST (COVERING HEDGES, DUMPING ECB GOLD BULLION), GOLD WILL ZIP EVER HIGHER. Its destiny is to do so.
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Jim Willie CB is the editor of the “HAT TRICK LETTER”
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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at JimWillieCB@aol.com