Kick Em When Down
Research for Online Investors

by John Dalt

8/25/11

There are some people in business that want to win.  There are some people in business that will do anything to win.  There are some people in business that after winning, kick you when you are down.  Put the CME in this group.  Gold ran to a record high over $1900 per ounce on Monday.

Now that gold’s price is down almost $200 per ounce, the CME decided to increase the margin requirements by 27%.  It seems they think the “volatility” is too high.  No kidding!  We covered the mechanics of trading commodities on August 11 in Gold Margin Hike; this was when the CME raised margin requirements 22%.

That margin increase knocked $50 bucks off gold in the next two days, and then it started climbing again.  The market discovered there was underlying strength in the gold market!  There were strong hands holding the contracts, they were sitting on plenty of profits to cover the larger margin requirements.

Last Wednesday, Hugo Chavez announced on television that Venezuela would nationalize the country’s gold miners and repatriate about 211 tonnes of gold held abroad.  The Presidentie said, “We held 99 tons of gold at the Bank of England since 1980.  I agree with bringing that home.  It’s a healthy decision.”  Venezuela has also requested $6.3 billion in cash reserves held at banks in the U.S., London, Switzerland and Belgium.  The money is to be transferred to banks in Russia, China and Brazil.

Chavez wants to bring his country’s gold home so it is out of reach of courts and other countries.  When he nationalizes oil, cement, mining and telecommunications assets the country has to go to international arbitration and pay for the seized property.  Moving the gold home removes about $11 billion dollars worth of “real money” from attachment by creditors.  Arbitration awards are presently estimated at $10 to $40 billion dollars according to Tamara Herrera of Santesis Financiera in Caracas.  She said, “There are many ongoing negotiations; the major ones, of course, are with oil companies.”

Bloomberg reports that Venezuela produces about 11 tonnes of gold per year.  Chavez claims that illegal miners extract another 11 million tonnes.

The World Gold Council places Venezuela’s gold reserves at 365.8 metric tons (tonnes).  One wonders where the 211 tonnes of gold that Venezuela wants shipped home is going to come from?  Is it held in the bank’s vaults, or have they loaned it out?

One of the ways banks defray the cost of holding gold for customers is to “loan” it out, which means there is a paper slip on the pallet in the vault.  J.P. Morgan reportedly only has 10.6 tonnes of gold in their vault.  I don’t think President Chavez will accept a paper I.O.U. for his gold.

With this as a back drop, is it any wonder the CME decided that gold was too volatile?  It sounds like there is more than one bank that needs to buy gold in the next two months to make delivery to Venezuela.  Commodity traders speculate that much gold being pulled out of the normal market for physical delivery may cause backwardation.  Backwardation means the current close contract for delivery (and spot price) will move higher to drag supply forward.  We have a good explanation of Contango and Backwardation under Investor Resources.  Gold contracts for delivery in six months may not increase as much as the close in contracts as buyers bid them up for immediate delivery.

We may have some entertainment in the next couple of months as 17,000 gold bars are shipped to Venezuela.  That is how many standard 400 oz. bars will have to be transferred.  It is hard not to smile thinking about the plots that will be made to relieve Chavez of his gold before it gets delivered.

The market is moving lower today.  What do people think the Bernank is going to say tomorrow?  Is he going to part the waters and give us all a dry path to prosperity?  We doubt his speech will give equities the “Bernanke Put” so many are hopeful for.  We will watch and bring you our take away.

All of our premium subscribers are long precious metals in one form or another.  It is the one non-correlated asset we can safely own in today’s market.  We suggest you get some shiny stuff, whether silver, gold or platinum.

Mailbag:
I think the fed is doing everything in its power, without adding more money to the situation, to drive up the stock market to try and try again to get the animal spirits going.—subscriber T.M.

John’s reply:  We are waiting.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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