Playing With Fire

September 11, 2000 – Readers will recall that one year ago I took a very strong view that the Gold market was about to experience a sharp short covering rally. I began discussing this point of view in August 1999, and wrote about the major short squeeze engineered in 1869 by Jim Fisk and Jay Gould.

Then in Letter No. 251 published on September 20th, 1999, I referred to the Bank of England auction scheduled for the following day. My comment was: “Look for the key $262 resistance level to be taken out this week. When that hurdle falls, then ‘Katie bar the door’. Gold will be well on its way to higher prices.” And so it was. As expected, Gold broke through $262, beginning a $65+ short covering rally over the following several weeks.

The question now is, will history repeat? One year later, is Gold about to rally after the BoE auction scheduled for September 19th?

Well, yes and no. I do expect the Gold price to begin rising later this month, but I do not expect that it will shoot up in a near vertical ascent like it did last year. This year I expect the climb will be more subdued and far less spectacular, but it will be steady nonetheless. My target is $325, which I expect will be reached by the end of the year.

The unusual factors that caused last year’s sharp shortcovering rally are not present this time around. Gold’s interest rates are close to normal levels, and they are not inverted this year. Moreover, those parties who have been manipulating the Gold price have recently lined up some central banks to dishoard their Gold, or make some of the metal in these banks available for lending. So at present, even though metal generally remains tight, there is no liquidity squeeze like last year. There is one other factor to consider – news.

Last year the European central banks on September 26th announced what has come to be known as the Washington Accord, an agreement which limited their lending of physical metal into the market. Their announcement caught everyone by surprise, but I could argue that it was already in the charts. In other words, the price pattern looked so very good in the weeks leading up to the announcement, that in reality it was not too surprising to have had a major news event. The price charts were saying that something unusual was about to happen, and the unusual thing turned out to be a major news event.

It is obvious that decisions such as those involved in the Washington Accord are not made at the spur of the moment. They are made weeks – if not months – in advance. So there is plenty of time for the insiders privy to the developing news to take their positions prior to its release, and leak the news to their friends. The actions of these insiders show up in the price charts (I’m sure none of the readers to these letters can be so naive to think that leaked information like this doesn’t happen).

In any case, while the price charts are now indicating that a move up is likely, they do not look as strong as they did this time last year. So I expect that prices will begin rising soon, but I am not looking for a spectacular, sharp rally. Rather it will be one that is slow but steady. And as a consequence, I expect that it will leave many players on the sidelines, which is typical for the beginning of a new bull market, when apathy is high and interest is low. But this is not to say that the Gold price couldn’t explode to the upside at any moment. The imbalances about which I have been writing for months still exist, the most important of which is the huge position that is short physical metal.

Several big banks and others owe physical metal, and thereis not sufficient metal available at current prices for them to purchase to cover their position. Therefore, like last Fall, the Gold price could explode again to the upside because the shorts are playing with fire. There is a huge short position out there. This metal is owed, but there is not enough metal available that could be bought at the current price to repay those shorts. A huge squeeze and price surge will eventually be the result.