The Battle for $700

May 14, 2007 – We have a battle on our hands. It’;s the Battle for $700, and it is just the latest clash in a long war being fought between gold and its perennial antagonist – the gold cartel.

I feel like an old soldier, having already endured so many of these battles. They happen because gold is undervalued, which means that it is being exchanged for dollars at too cheap a price. So gold tries to correct this imbalance in a normal market response by climbing higher, but is prevented from doing so by the gold cartel. It is these confrontations that have led to the recurring battles.

I think we can learn from these head-to-head clashes. There are lessons from the past that can be heartening at times like this when gold gets repeatedly repelled from $700. It is important to recognize that every time gold and the cartel have battled in the past, gold eventually won.

For example, back in March 2001, I wrote the following about the Battle for $272:

“Open interest on Comex calls in the last few days has risen by 16,000 contracts. That’;s 1.6 million ounces, or nearly 50 tonnes. Who would be willing to take the risk of selling these calls with gold so cheap? Probably the same central banks who have been manipulating the price. They are still trying to keep the gold price under their thumb. Will they succeed yet again? There’;s the rub. No one knows. The markets may be getting ready to ‘throw away the key’;, but maybe not. While we know that gold is unbelievably cheap and eventually going higher, we just don’;t know when.

Watch the $272 level. Gold probed that level today, but backed off, though still closed up over $5 on the day. If $272 is hurdled, the long awaited rally may be finally underway. And it also may be the rally in which those who have been manipulating the gold price are finally forced to throw in the towel, just as they were forced to do so the last time the price of gold was being manipulated, which was in 1971.”

Gold eventually broke through the lines the gold cartel had mobilized at $272, and climbed higher. But the gold cartel staged a retreat, and eventually we got the War for $325. So significant was $325 that I wrote the following in March 2002:

“If you are old enough to remember when President Nixon closed the ‘Gold Window’; on August 15, 1971, you have an advantage over those who did not experience that event and the subsequent rise in the gold price. We are at I believe a similar moment in time. Maybe we are only at the equivalent of January 1971, or perhaps as close as August 1, 1971. We just don’;t know for sure how close we are to the launch date, but the important point is that the launch date is indeed coming.“

It took another 6 months, but $325 was indeed hurdled, on December 6, 2002. So important was that battle that I continued to write about $325 for months. For example, I penned the following in February 2003:

“For the past six years of this 20-plus-year consolidation, gold traded under $325. During this period gold moved out from weak hands into the strong hands that were accumulating it at those bargain basement levels. To make that base even more convincing and technically significant, we had a selling climax in the middle of that base when gold was dumped after the Bank of England announcement, causing it to reach a low of $252 in July 1999. As the BoE began its dishoarding, those who recognized that gold was undervalued (us included) were buying while the BoE was selling.

Then with the breakout above $325, gold’;s base was firmly in place. This base defines the bottom in gold. Time will tell of course, but I don’;t think we’;ll ever see those prices again. Just as gold never looked back when it started its final break away from $35 in the early 1970′;s, gold is again not looking back. $325, $330, $340 and probably even $350 – those prices are history and won’;t be seen again. Again, only time will tell, but my scenario from here is quite clear.

Because gold is moving higher from such historically undervalued levels and because so many people have been left standing on the platform when the gold-train started pulling away from the station with the break above $325, it is onward and upward for gold from here.”

And so it was. But then came the battles for $420, $450, $500, and since last May, we have been fighting the Battle for $700. Gold will win this time too, but again, we are frustrated and irritated that there is even a battle at all.

Who is the gold cartel? And what are they trying to accomplish? The gold cartel is an alliance of governments and a few bullion banks. This group is led by the US government. Though their aims are different, their congruent interests put them on the same side. Here’;s what they are trying to do.

The US government wants the US dollar to continue as the world’;s reserve currency. But the dollar is no longer worthy of holding this privileged position. It is not sound money that can be used reliably in international commerce. It is being inflated and debased, which are actions that erode its usefulness as currency. It is also being used as a political tool, which again makes it unreliable money for cross-border commerce.

So the US government has a problem. Gold has always held the position of international money, and currencies only became reserve currencies because they were “as good as gold”, which is what the dollar used to be. Now, however, gold and the dollar are competitors, with the result that a rising gold price shows how badly the dollar is being managed. This reality decreases the demand for the dollar, making it more difficult for it to remain unchallenged as the world’;s reserve currency.

Consequently, the US government wants a low gold price to make the dollar look good. Its strategists believe that a low gold price will make people think the dollar is being well managed, which obviously is a necessary precondition for anyone to continue using it. After all, if people truly understood how vulnerable the dollar is to a collapse, the demand for the dollar would decline even more rapidly than it is already declining.

Most other governments within the US orbit work toward the same objective. Though they may be envious of the dollar’;s privileged position, in the end they accept it because these other governments are also fiat money advocates. By keeping the dollar-monetary system functioning, they can also perpetuate the myth of fiat money by creating their own currencies ‘out of thin air’;, thereby enabling these governments to do what all governments want, namely, to use newly created fiat currency to preserve their own position of privilege and power.

Their aims are clear, but governments don’;t directly trade in the gold market. They enlist the help of the bullion banks, but not all of them of course, just the 2 or 3 largest ones in order to keep the cabal as small as possible. After all, the bullion banks stand to make fortunes by working with the government, and they obviously don’;t want to spread this profit around needlessly to other banks that are not needed in the price manipulation scheme.

The bullion banks make money in two ways. First, they earn the contango. In other words, by being short at all times, they earn the interest income available from gold. It works like this.

Because gold is money, its future contracts always trade at a higher price than the spot price. This is called contango, and is the opposite of every other commodity. Because they are not money, other commodities trade in backwardation, meaning their future contracts always trade below the spot price, except in abnormal circumstances, for example, where supply is disrupted by an unforeseen event.

So by being short the contango, bullion banks are always selling gold for future delivery above the spot price. If the spot price is unchanged or lower when those future commitments come due, the bullion banks make money on the difference between the price at which they sold and the spot price on the due date. But if the spot price is higher, they lose money, so clearly the bullion banks do not want a rising gold price.

The second way bullion banks make money is by what I call “picking the market’;s pockets”. There are a number of ways they do this. For example, because they execute the government’;s trades, they know when large amounts of gold are going to be dumped into the market as part of the gold’;s cabal’;s price manipulation scheme. So the bullion banks “front run” those trades by selling first, and then profit from the price slide that occurs when the big government order is dumped on the market. So in essence the bullion banks are strapping on a feed-bag by working with the government.

It can be discouraging when viewing this state of affairs. However, we should instead focus on the important parts, which are that gold is in a bull market that is now more than six years old and that notwithstanding this fact, gold remains undervalued. Or to put it another way, the dollar is overvalued.

So sell the dollar and buy gold because the Battle for $700 will end the same way the other battles have ended; gold will win the battle. The gold cartel is losing the war. In the end, the market is bigger than the government.