Gold Wars of Attrition
By - October 31, 2008

The spot price of gold as quoted by NYMEX is no longer an accurate representation of the real price at which physical gold bullion is being traded. It is, in fact, a lie. This is apparent by the great disparity between the availability of gold and the virtual shutting down of all sales operations related to delivery of anything denominated in one ounce units. Buffalos, Krugerrands, name it, you can't buy ‘em. The idea of "Futures" was originally established as a mechanism for price discovery, not price determination. Yet this very mechanism, first deployed as way for bankers to capitalize farmers in the spring with a relative degree of certainty as to what the farmer would reap in the fall, has become a tool for the manipulation of the gold market. In creating such huge short positions in the futures market, and driving the price down, the spot price suffers as a result of the physical short created to hedge against a paper long. – Midas Letter

Dominant Social Theme: None. If this happens, it won't be a good thing for social themes of the elite.

Free-Market Analysis: This subject can be made complex, but it is really quite simple. Here at the Daily Bell, we've been commenting on it for months, but now a spate of articles have hit the hard-money and alternative ‘net press predicting that fairly significant events will occur in the precious metals markets.

The above article, excerpted, makes the point that we've been pounding home recently – when a market diverges from reality, then it is the market, not the reality, that ultimately suffers. Right now the Comex is maintaining a gold price far below the price at which you can buy gold in the real world. You can see this on eBay and elsewhere where gold sells for a "premium" in the hundreds of dollars for a single coin. The premium is the same, percentage-wise, for silver.

Humorously, the spread between Comex prices and real gold prices continues to be called a "premium." It is not a premium. Chances are it is the real price. So why does the Comex gold price continue to be respected? Outside of its historical merit, the reason Comex prices continue to be quoted as the "real" price is because the Comex itself stands behind the price. In other words, individuals and firms can seek delivery of gold and be assured that the gold will come at the price demanded and accepted.

But what if one day the gold does not come?

Currently, an ever-enlarging group of enraged gold and silver bugs are demanding to be filled. Their idea is that sooner or later, they will not receive their orders. At these official prices, so the theory goes, there is not enough gold circulating above-ground to fill the increasing demand. Additionally, since prices are being artificially suppressed, not enough gold and silver is being mined. Only when the price goes up enough to reflect demand, will enough mines open up again to fulfill that demand. See, that's how money, real money, works in the real world. That's how the supply of money regulates itself. But when you tamper with the price, you tamper with both supply and demand signals. You confuse the market. And it is not a game you can play forever since both silver and gold are in-demand and the demand keeps expanding. If you choke off supply, then the demand sends the prices way up. You get, eventually, a buying panic, and that is where we are surely headed.

It will take a single default of the Comex to get us there. As soon as the Comex defaults, the game will be up. Or at least it will move on. God knows to what. Enforced confiscation of gold and silver. Renewed accusations of hoarding. Hotter, wider wars?

Could a default happen? The laws of supply and demand seem to indicate not only that it could, but that it will. The gap between the Comex price and the price on the open market is real, not imaginery, and it is wide and getting wider. In other words, the price, as it stands, is not a conspiracy theory, as many gold-bug commentators, including the one excerpted, above, are glad to point out. Here is more from the same article:

The fact that bullion dealers are paying and charging premiums to the spot price for gold is clear evidence that the spot price published each day is no longer an accurate representation of the price of gold, and its continuing publication as such must soon be identified as fraudulent, and corrected. The likelihood of that happening, however, is contingent upon the admission by various U.S. government entities that they have participated in the suppression of the gold price, and that is simply not likely to happen in this lifetime. Just as front line MP's and soldiers were court-martialed for the excesses of violence perpetrated on detainees from Iraq and Afghanistan, heads will likely roll in theatrical fashion to satisfy a media-moderated demand for blood. The danger here is that we have several new bubbles building, and the massive inflation of currencies worldwide now underway, while acting temporarily to stave off the inevitable explosive correction, is steadily adding pressure to the chamber in which this monetary ordinance is being compressed. When the price of gold does finally erupt as the massive currency devaluation going on outside of the United States Dollar causes panic selling, the damage will again be amplified exponentially because of disingenuous misinformation distribution.

We've talked about a buying panic, and a default at the Comex would likely set one off. As far as how price suppression is occurring and why, well, regular readers of this letter can probably come to their own conclusions. For newbies and casual readers, we will simply point out that paper money, often called fiat money, is controlled by central banks, and thus under the control of individual human entities, not free-markets. These entities, call them the monetary elite, set the price of money by controlling the supply and short-term interest rates, among other things. To control the supply of money is very big deal. Gold and silver constitute free-market money and are not amenable to the same kind of control. If you controlled the supply of money, would you be a big fan of gold and silver?

After Thoughts

We continue to have our suspicions about the current financial crisis. We think that while the powers-that-be might not have minded a bit of a crisis, the thing has gotten out of control. Thus, we also have our suspicions that the suppression of the price of gold and silver is being clumsily done because it wasn't supposed to come to that. To put it another way, in a better world (for the monetary elite, anyway) such shenanigans would not be so obvious. Obvious is desperate. And desperate is not well planned. It could be that, for this set of Masters of the Universe, anyway, things have gone temporarily awry. And if that's the case, look out gold (and silver). Interesting times.

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