[ECON] Why Gold will be over $400 by the end of September

I went to the trouble of making this prediction on PruBear and explaining it on the silver thread but I thought I ought to air it on it's own thread. That way everyone can research the prediction later if I am wrong and shoot arrows at me. Here is why I said what I did.

Gold is due to get over $400/oz by the end of September at option expiry. The gold contract for October has options that expire the 4th to last trading day of the prior month which is in the last week of September. When the options expire, if they are delivered against, they require a gold futures contract to be delivered to the holder by the seller. If the call isn't in the money, there is no delivery, if the call is in the money, the seller delivers a futures contract for delivery in the next month and the transaction is completed at the option strike price. So in the case of a 350 call, the contract is for 100 oz of gold at 350 which allows the holder to take delivery on 100oz of gold at 350 in October. A contract holder may stand for delivery at any time in the Contract expiration month. Therefore if gold closes at $400 and the holder of a $350 call takes delivery on their contract, they can sell it for a profit because there is a $50/oz profit in it or they can take delivery on $400/oz gold for just $350/oz.

There are a lot of calls sold above 370 all the way through 400. Because of the way that the Black-Scholes model works, the option sellers have to begin making purchases of futures contracts as their strike prices are approached in order to hedge their risk. When the price of gold is higher than the call price, they have to buy more. As the paper price of gold rises through a heavy call level (say 5000 contracts) the sellers must begin to cover whcih causes demand for futures contracts. The only way that the demand can be met is for shorts to enter the market. If the open interest is already very high, selling short is risky. If there are no shorts interested, then the current futures contracts represent the market and they are bid up which pushes the price of gold towards yet another heavily subscribed strike. It is a self-reinforcing cycle known as a short squeeze and the price of gold will not stabilize until the shorts have covered and the winners begin to take profits.

Now in order to counteract an increase in short interest by paper shorts, the people that have in interest in squeezing the shorts will also enter the physical market because this exerts upward pressure on the spot price which directly affects the futures price. It should always be the case that he futures price is a little higher than the spot price, if not, the market is in backwardation and that is extremely bullish. So purchases on the spot market combined with futures buying causes the call sellers to cover in the paper market and keeps the paper shorts from increasing the open interest because of a rising spot price. It is an interesting game and the shorts have lost every expiry since February. The longs are cleaning the shorts clocks and it is putting a strong upward pressure on gold.

Finally, if you look at the gold chart, we broke out of an ascending triangle yesterday, that has been forming since February. I have been talking about this option phenomenom on the PruBear board since January when I first noticed it. It has been a great indicator every option expiry. The triangle breakout should measure about $60/oz so from $360, that should take us up to around $420. It should be fun to watch gold run this next month. It will also be interesting to hear all the news excuses for it that have nothing to do with the real reason which can be plainly seen from an examination of the market itself......

Here is a table of the call action for October

Strike OI

340 1764
350 5163
360 7170
370 11718
380 7111
390 3485
400 9650
420 3338
430 747
440 163
450 1877

Now you can see why there is so much of a fight around 370 and look at the acceleration potential as we approach 400. Should get interesting.

Gold just popped this morning. Right now over $371.

11:21am EST

AU 372.30

gold looks like its closing in on $373.00 & silver at $5.10...

Au 373.20 and rising.

Platinum 712.50 and rising.

Darn and I just sold 38gms of industrial Pt yesterday... should have waited, could have paid the tip for dinner

Interesting newsletter snippet below, both for what's just happened to gold price this morning and for what it says to now watch for to possibly come next, from...
http://www.kitco.com/ind/Akerman/aug262003.html
...that was apparently written yesterday:

A Surge Protection Team?

TRADING NOTES: Gold looks poised for an aggressive stab at $370, so we may soon learn more about whether the Fed has taken an active interest in suppressing its price. Suspicions that the central bank may have begun to do so recently were nicely fleshed out in an essay we quoted here the other day by PruBear’s Marshall Auerback. He offered as evidence some coy comments made by Robert McTeer, the head of the Dallas Fed, who implied in an interview with Steve Forbes that $350 was just the right price to induce the monetarists among us to think the Fed was being neither too loose nor too tight. Of course, gold futures are trading closer to $370 now than to $350, raising the question of whether the bankers may already have thrown in the towel on their supposed Maginot Line at $350.

Sorry I can’t reproduce a gold chart in the newsletter, but I hope you’ll take my word for it when I say that the $370 level looks pretty vulnerable to an assault. The December Comex futures have traced out numerous tops near that level since May, creating a rampart of sorts on the daily chart that can only further entice the barbarians to try and overrun it. If you were all-powerful, as the Fed is assumed to be, how might you attempt to hold the line?

Personally, I’d come in for a kill shot at day’s end, shorting a truckload of December gold contracts to dampen any possible spillover effect in London and Tokyo. It’s not as risky as it sounds, since the Fed would presumably have help from central banks around the world. Someday, I would surmise, the lot of them together will not be able to keep bullion prices from exploding. If and when that happens, it will become that much more difficult for the central bankers to pacify the currency and bond markets as they’ve been able to do so far."
__________________________________

This chart is refreshed & updated everytime you re-load this page, so we'll all watch & see now how it'll all wrap up today...


__________________________________

-Shane
KI4U, Inc.

and I'm short

Click to expand...

How could you? the 400 to 420 predictions have been coming from many directions.

Well, I see you zapped it.

It's just a prediction now and we know what happesn to them around here

I like the article posted by shane because I am wondering about the McTeer put as it has been called. Anyway, I think it's hedge funds at work here and I also think that it's quite possible that the shorts don't have the gold to deliver. That was my comment about open interest. If open interest continues to rise, that could be a problem for the longs (it might imply the shorts have been able to lease gold and are able to deliver) unless they are willing to start warehousing the gold. If they are, then it's game over for the Fed because the number of dollars it has printed under the McTeer printing press regime is far too many to hold the line on gold at $370 or below..........

I was going to post this under a new thread, but allow me to segway....

Perhaps the step rise is metals (along with a drop in the value of the US $) is caused by people panicing, looking to put there money somewhere besides real property and $ denominated equities (the latest bubble)....

Complements of the Kansas City Star:

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http://www.kansascity.com/mld/kansascitystar/business/6623649.htm

".....Meanwhile, another flashing caution light is perhaps an even more telling sign the housing market not only has topped but also may be turning into a bubble, much as stocks did three years ago and bonds show signs of doing.

The New York Times recently reported a surge in mortgages that require borrowers to pay only the interest on their loans for the first few years. More troubling, perhaps, is that demand for interest-only mortgages for higher-end units is especially strong. This probably means these buyers seek more house than they can afford in hopes of realizing an investment bonanza as well as a place to live.

Experts attribute the rising demand for interest-only mortgages to higher mortgage rates, but this doesn't ring quite true. Even with the rate spike of the past couple of months, mortgages aren't all that pricey when compared with the average of rates over the past year or so.

No, what this development seems to imply is that speculative juices are starting to boil, and lenders are more than happy to keep elevated demand by lowering lending standards.

There is perhaps nothing more potentially debilitating to neighborhood health than not requiring homebuyers to steadily build their equity stakes. Those who live in houses without having meaningful equity are merely renters posing as owners.

As a result, pride of ownership isn't adequately nurtured, and the sense of responsibility fostered by ownership is usually lacking. Thus, it becomes easy to neglect the property.

Subsequently, without sufficient equity, it also becomes easy to walk away from the house if personal fortunes take a turn for the worse.

The risk is creating a neighborhood with a neglected vacant-house problem that is at increasing risk of blight.

This is too often the way housing booms end -- when they become bubbles. They happen because the industry can't bear to see the party end. Perhaps it was too much to hope that things would be different this time around."

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.....or is it the up coming Bond sale that may well flop..... I'm not sure what will happen if there are bonds available for sale that no one wants.....

Would the price contine to drop, with yeilds increasing until someone picks the things up? Would this, in turn, create higher interest rates making borrowing more expensive, puting gasoline on the fire of inflation....

..... thus pushing down the value of the $ and pushing up the value of metals????

A while ago there was someone on this forum who was very adamant that gold was going down to $250 or below. haven't any idea who that was now.

brkthr probably

He hasn't been around for a while. He predicted gold would go to $186 by May, which it didn't. He also predicted the markets would crash in May then in June, which they didn't. He might be right in the fall but it remains to be seen.....

He might have gone broke after being wrong because he was absolutely certain and posted a last warning post that got lot's of replies.

Yep, brkthr. That was the one. I remember the final warning. He was so positive that he had it figured out.

Thanks

[ECON] Gold, from Sinclair last Friday

There are charts that go with this. The link to his site is part of this article: check under Archives.

Fri Aug 22, 2003
Heads Up
Author: Jim Sinclair
--------------------------------------------------------------------------------

Regardless of the fact that today is Friday and we have not accomplished $372 please stay on alert. On the US treasuries versus the US dollar battlefront there is strong evidence and convincing mathematics that the dollar move has been an act of stabilization in order to prevent huge amounts of US treasuries from coming into the market for sale.

That sale - if it occurred - would trigger the already vibrating derivative mountain into a most difficult situation based on an almost universal mismatching of interest rate direction and time. That mismatching is in my opinion not in the few but in at least 95% of all derivatives on all assets created since 1991.

That is therefore an ingredient of more than 90% of the now notional value -- replacement value of over $150 trillion in derivatives. Please read the article on www.jsmineset.com concerning this phenomenon.

Regarding gold, I would suggest that you monitor the Power Down Trend lines initiated from the high on gold itself and gold shares. Should that PUT [I think he meant PDT] break upwards (which it has not as of 10:14 AM EST) from this moment until Wednesday of next week, I believe that we will go directly to $400 with the keen possibility of the upward projection of $430. The rationale for this alert is contained now on www.jsmineset.com
This is Heads Up and not a call to action

My comment: He expected 372 a bit sooner. Key date given was today, THIS Wednesday. First 400 and then 430 possible. He is just one several predicting gold >400. His reasoning, a combination of fundamentals and charts is contained in many of his daily comments.

I get his alerts when he sends them

He trades a lot and uses a different technical methodology and he is basing his analsysis of the market on a different set of factors than me. I have been following him for a while but he has called for 400 much earlier in the year. It took me until the big runup collapsed in February to really understand how this option thing was working. I thought it would be the trigger to the big short squeeze but it seems that this is to a great degree a hot-money and paper profit game so it isn't the big short squeeze everyone like GATA has been looking for. I think that is going to come in to play once we are substantially above 400. Those kinds of prices and moves are going to bring in people that want to get gold now before its in 4 digit range. Typically that will be people willing to commit $500,000 or more as an individual, not super rich but with enough funds to need to protect it somewhere besides a bank.

brkthr HAS been lurking very recently according to the board log files.

But he hasn't posted since early June.

Come on brkthr, jump back in here and 'splain what's happening and why it hasn't turned out as you expected.

Kris

not much to say Kris

The correction in gold I spoke of earlier took a little longer than I expected to complete.

As I said on 06/10/03
"The five-wave form of gold's decline from June 5th high confirms that gold’s bear market is back. After a brief a-b-c correction of that decline, I expect the decline to below $300 to resume."

That correction is now complete and the bear market in gold will resume shortly.
I closed out my last long position in gold today.


The same is true for the bear market rally in stocks.

The correction from March is complete and the bear market in equities is about to resume with a vengeance.

James

brkthr said:

The same is true for the bear market rally in stocks.

The correction from March is complete and the bear market in equities is about to resume with a vengeance.

James

Click to expand...

agreed

Reliance said:

agreed

Click to expand...

Also agree with that quote about stocks, but as we discussed much earlier in the year the odds strongly favors a big rise in gold.

While there is a small chance that an unexpected event may cause gold to drop, there is a much greater chance that gold will continue the steady upward move began two years ago. My position is substantially based on the theory that the supply of parer money constantly increases relative to the amount of gold. Could our money supply drop? Yes it could, but then the government will think of some way to spend or give away more money to make up for that.

HB

You are correct in saying the POG is directly proportional to the increase in the fiat money supply without a concurrent increase in production ie. debasement=inflation.

The error being made is in thinking interest rates are rising due to debasement or inflation when the exact opposite is occurring.

All money is created through the issuance of DEBT.

Deflation is actually destroying money through debt default at about the same rate it is being created.

Interest Rates are rising because the RISK associated with debt is rising, and the lenders are asking for higher and higher risk premium to take the other side of the trade.

Watch the next Treasury auction and you will see how this is playing out.

The recent rise in the POG is purely speculative based on a misperceived assumption about inflation.

James

http://quote.bloomberg.com/apps/news?pid=10000082&sid=aqfsVDoL07BU&refer=canada

Gold Rises to 6-Month High as U.S. Deficit May Send Dollar Down
Aug. 27 (Bloomberg) -- Gold futures in New York rose to their highest price in more than six months on trader expectations for a decline in the dollar against the euro as the U.S. tries to trim its budget deficit.

A decline today in the dollar against the euro, its first in eight sessions, boosted gold by making the dollar-priced metal cheaper for buyers using other currencies. Further declines in the dollar are likely as the U.S. takes steps to trim a deficit that may reach record size next year, investors said.

``Somebody has to finance the deficit,'' said Heinz Thoma, a fund manager at Global Strategic Management in Annapolis, Maryland, which has about 65 percent of its $85 million under management in gold stocks after recent purchases. ``The Fed is ready to print more dollars, and at some point people will have too many dollars and want to diversify into gold.''

Gold for December delivery rose $7.30, or 2 percent, to $374.10 an ounce on the Comex division of the New York Mercantile Exchange, the highest closing price for a most-active contract since Feb. 5 and biggest one-day gain since July 23.

Gold futures, which have risen 19 percent in the past year, may reach $400 an ounce by the end of 2003 as the dollar slides, Thoma said.

The U.S. budget deficit may rise to $480 billion in the fiscal year beginning Oct. 1, according to the Congressional Budget Office. Over 10 years, the cumulative deficit will reach $1.4 trillion, excluding pending legislation on military costs, taxes or Medicare, the non-partisan congressional agency predicted.

Middle East

The rally in gold today accelerated after prices rose above $368.20 an ounce, triggering buying by hedge funds that had placed orders at that price, said David Meger, a senior analyst at Alaron Trading Corp. in Chicago. The gain sent gold beyond the narrow range in which it had been trading since reaching a seven- week intraday high of $369.70 on July 28.

Gold has also been boosted in recent days by increased violence between Israel and the Palestinians that shattered a truce declared on June 29, prompting speculation by traders that investors in the Middle East would buy gold as a haven for their assets.

``There's a significant probability of an escalation of tension'' that will lead to further demand for gold, said David Hightower, president of Hightower Report, a Chicago-based research company. Gold is benefiting ``from a little flight to quality.''

Gold prices often rise in times of increased world tensions. A three-year slump in stock prices, combined with prospects of a U.S. attack on Iraq, helped send gold futures to a six-year high of $390.80 an ounce in February.

Shares of mining companies also rose. The Philadelphia Gold & Silver Index of 11 mining companies was up 3.8 percent in afternoon trading.

Denver-based Newmont Mining Corp., the world's biggest gold producer, rose $1.31, or 3.5 percent, to $39.05 at 2:48 p.m. in New York Stock Exchange composite trading. The stock has risen by about one third this year.

Last Updated: August 27, 2003 15:16 EDT

Debt is the key James, but I don't understand why you DGI on gold

The fact that interest rate risk and default risk are rising in tandem is clearly a sign that investors should seek strategies to preserve capital. Moving money into gold is one tried and true method for doing that. The amount of gold available for moving money into compared to the amount of paper financial instruments out there is tiny. A well to do individual with any sense will begin to recognize that there is a lot of risk in having all of ones wealth tied up in computer credits. If one doesn't purchase tangible items with their "wealth", it is subject to disappearing because of one of the aforementioned risks. I believe that there are wealthy people out there buying gold, in fact I have been told of a few. So as that number gradually increases, gold will rise in price irrespective of what you call deflation.

By the way, would a mortgage market collapse produce deflation or simply a liquidity problem? Is a stock worthless because it's no bid or is it simply not marketable? There is a difference you understand. Just because the market was no-bid after 9/11 didn't mean the stocks were worthless. Same is true of homes and other tangibles. If the debt were to collapse around those things, there would be absolutely no change in the money supply because that debtberg isn't part of the money supply. It does however require that it's interest be paid through the current money supply and I suspect that is going to cause the Fed to monetize much of this government debt that is being produced in mass quantities so that there can be a continued servicing of that debtberg. Hence, I would conclude that you are all wet about your assuption vis-a-vis deflation. Al is just along for the ride now, there is a ring in his nose and it is the size of the mortgage market and the amount of interest demanded by it on a daily basis. As rates rise, the interest demands of that market will rise as well. It is a guarantee of monetization in one form or another which as you know is inflation in the classic sense, not deflation.

wrs - Great work on the gold market.

Today's broad money supply indicator (known as M3) shows that the delayed effect of the spring time mortgage boom is cresting and may be turning down - as new mortgages are created as a much slower pace. While at first glance that may seem to support the deflationary theory that brkthr put forward, and he will be right in general in the short run, it will be just a matter of time before either the Fed or Government itself responds by issuing either new money or new debt (In our system of digital money, money and debt are much the same thing anyway). The gold market will respond as this new money/debt is created.
Unless you think that the US government can't and won't intervene in the economy that may abruptly weaken i the near future, gold is a good investment.

For those that can't buy gold, you may want to consider CEF - Central Fund of Canada traded on the stock market - whose only business is to keep and own gold & silver bullion.

I don't claim to really understand what passes for trading in gold futures and options, but I would like to ask a question.

Just yesterday there was a consulting mining geologist in another forum that mentioned he personally knew of five mines that were either going to start new new production or resume working an old mine now that the price of gold has risen high enough to make working the deposits practical.

He feels this will pump new gold into the market and cause the price to fall again, but that the mines are likely to continue in production since they'll be past the initial production hurdles.

What say you folks?

={Oak}-

oak...

"He feels this will pump new gold into the market and cause the price to fall again,"

A lot of folks buy gold as a hedge against a currency/stock/bond collapse. Fallen prices in gold are better than worthless pieces of paper, or so the theory goes. ( a theory I adhere to).

Live Oak,

If he is right with his claim of production resumption it only shows the long range expectation of the gold miners.
They wouldn't do it if they expected their action to have any significant negative influence on price.

I wonder a little why he would add his opinion of negative gold price development to the fact of mine production resumption.
Looks like he wants to deliberately suppress optimism. That I do understand. If everyone on Financial Entertainment TV would say that gold is expected to rise, the shorts would be blown to bankruptcy. So there is a significant trend to muffle any positive gold news and enforce the perception that gold investment is risky.

Thats a supply argument for pricing gold

Live-Oak
I don't buy supply pricing arguments saying gold will be cheaper in the future. The Central Banks have sold an amount equivalent to several new discoveries in the last few years and the price keeps rising. That used to be the case for oil but now that oil is so hard to find in quantity, it isn't the case any longer. If oil were going to get cheaper it would be there by now, just look at the worlds economies, they are in recession as far as the eye can see and oil is still $32/bbl. The still high price of oil is pointing to a higher gold price because it says that the paper money is weaker. The paper money was at is strongest back in the late 90s because it is simply an appearance, not a reality. Gold is a tangible reality and eventually people will discover that appearances don't pay the bills if the bill collector demands something tangible and real.

No, the real driver of the gold price will be instability in the paper markets and higher risk of default in the bond markets. As defaults increase, more wealthy investors that have been happy to have a return will question the safety of their principal and seek to preserve it. In addition, once the price curve of gold begins to accelerate noticably (and it hasn't yet by any means) it will bring more speculators to the market which should cause a parabolic curve on the price chart. At some point we will see gold priced at 4 digits per ounce but by that time if you bought gold and gold stocks when gold was $260-$400/oz, you are in great shape. I think sub $400 gold will be a thing of the past very soon.

Hiding Bear,
Thanks......

Shane's live link above is worth watching today, Aug 29, 2003!

Gold battle is heating up, looks like a close over 380 today

It was hot yesterday but the price change didn't show it. I think I read that open interest increased another 7,000 or so contracts yesterday on the COMEX. The cost of that at 50% margin is $137M so it's not small specs that are playing the long gold game. It is someone with very deep pockets and I think my prediction that gold is going to be over $410 by the end of the month was reinforced by the action yesterday and now this morning. Gold was up in London big time before the COMEX open and that is very interesting because it means that either someone believes that the market in NY is going up or that there is a big risk of continuing to be short.

I think the commercials have met their match/mismatch and they may have to start covering soon because if we get into a close over 380, we should be headed for $400 at the next stop. I have gotten burned in the past buying the spikes but at this point, I don't see much choice, I don't believe in a correction below this point because we have done so much basing above 360 since June. Gold at 346 was a great deal back in July but unfortunately I had no spare change so I couldn't jump on it. I do have some spare change now and Im going to be forced to buy now but I don't think I will regret it because I think gold has a strong possibility of being over $500 by the end of the year without looking back. In other words, when we get over $400, I don't think there will be a signficant test there, it's more likely to be at $425 or higher...........i

WRS, Go to Bulliondesk.com...Scroll down to "Judge OK's Blanchard suit". Then check JPM prices....

They seemed to have learned from Reg Howe's, et al, attempt.

I'm just a dumb layman when it comes to the economy. However I do play a good game with the business I have ran now for over 13 years.

My prediction of massive inflation still stands by year end or the next presidents first term in office. Why? Simply because of to much liability. The lawyers and government mandated controls on small and large business in America is like aids, it will kill us. First in California, then the rest of the nation. And Banksters giveing the fiat TP away left and right.

Hyper-inflation seems a logical prospect to me, except for the cheap siht you buy from china-mart.

Thus gold should do well.

Re: Gold battle is heating up, looks like a close over 380 today

wrs said:

I think the commercials have met their match/mismatch and they may have to start covering soon because if we get into a close over 380, we should be headed for $400 at the next stop.

Click to expand...

*Jewish mother voice*

"From your mouth to God's ears."

*regular voice*

You got your wish - close today at $382 and change. Durban Deep up over 11% in *one day.* JPM didn't take much of a hit from the Blanchard lawsuit, but it's starting to look like any news is good news for gold.

Silver's on a bit of a tear as well, although it's still not gone up very much. I should get some more.

St. Marc

I was looking at DROOY two days ago

It was at $2.50 and I was thinking, gee DROOY looks cheap, cousre I can remember when it was less than a buck to so I didn't pull the trigger on it, wish I had.

I did buy some gold today like I said I would, Im not going to be dissappointed.

A year or so ago, I sent out a message to pretty much everybody I knew explaining in layman's terms the problems with mounting debt and the untenable situtation with regard to the gold and silver markets, pleading for them to diversify their savings and investments, even just a little. I did *not* tell everybody to put their worldly wealth into shotguns and canned goods, just urged them to put a little into silver, gold, and PM stocks.

While several of them did take a flyer, I think, only one bought any stocks I mentioned as being good investments if the price of gold rose. Don't know how much he bought, but he's very rich, and what he bought was DRD, at about $1.00 a share.

Hopefully he will remember who helped him get a little richer.

St. Marc

An ounce of gold will not go UP to four hundred dollars by the end of the month (or when ever) What will happen is that the dollar will go DOWN to one four hundredth of an ounce of gold.

A significant difference.

St. Marc, it should be at least worth dinner

That's pretty good buying DROOY back then because not many people wanted to. They did have a lot of problems, I was more cautious and bought GG, I have about a 40% gain in it right now.

muleskinner,
You are of course correct and the dollar is likely to drop to 1/500th ounce of gold by the end of the year............

Interesting reading this morning.......


http://news.goldseek.com/GoldLetter/1063230659.php

I vaguely remember a thread floating around here that come August Joe 6-pac was going to be able to easily get into the gold market via the stock market.

Anything actually happen?

World Gold Council, Gold ETF, I think thats this month

Troke it's a gold ETF (Exchange Traded Fund) it will buy gold in the market as it receives funds and it will be traded on the NYSE. It's pending SEC approval and I think I read it will open this month or next. Each share represents 1/10th ounce of gold and the gold will not be leased out and every share will be 100% backed by physical gold.

Heres a link to an article about it

The ETF will not pay out in gold if you have less than $10,000 invested. If you are interested in owning gold just buy gold. Why let another layer of paper shufflers take your money? A scam, is a scam, is a scam. They hold the gold, you hold the bag.