The 85 billion per month bond buying program known as the Federal stimulus or better known as, Quantitative Easing, QE, appears that it may finally begin tapering down as many expect following a report from the G-20 summit in St. Petersburg, Russia. However, all this looms over whether we will proceed with intervention in Syria’s civil war, which could again hold off the Federal Reserve from making the decision to begin tapering down quantitative easing, thus keeping gold prices down for the short term.
The federal stimulus has been a key driver in all the gold rallies in recent years and its appeal as a hedge against inflation cannot be overstated. However, the 18% drop on gold bullion so far this year has been mostly blamed on the central bank that it would, as expected taper its asset purchases before next weeks meeting. Enduring this time you have India’s rupee trading at an all-time low, while at the moment India through New Delhi has raised the import duty on gold to an all-time high of 10%. Spreading the cause of making it hard to obtain gold is the paper gold conundrum which satisfies contradictions to continue to abound in the financial world especially when you get into the paper gold ETF, electronic traded funds. The big spenders who have cut their gold ETF holdings by 55%, among them is George Soros, who did that in the fourth quarter of 2012. More dangerously volatile than physical ETFs are synthetic ETFs due to their very nature of their backing. Furthermore, synthetic ETFs are more popular and widely used in Europe than in the US. As illustrated, a far off major financial ETF crisis may be on the horizon and unavoidable in Europe, at least the Fed isn’t buying these funds. Eurozone economy however is pulling out the recession with help from Germany and France. Away from paper gold and back to physical gold, if the European countries were forced to sell like, Cyprus, the gold wouldn’t be flooded onto the physical markets, I don’t believe. The Euro Gold would be mostly absorbed by China and Asian buyers. But all these examples of contradictions and similarities in buying and selling of precious metals, especially gold, doesn’t amount to the current low correction in the market, that I feel is a result of money fleeing from the market, not because of any per se reflection on gold’s long-term speculation which is poised to gain achievable of new heights within a year. But what turns out is that the same paper ETFs that over the course of the past few months have helped drive the price of gold down are going to run into the hard wall of reality that the physical gold demand is increasing. In April, this year we saw paper gold flee the market, record high ETF outflows resulted in a gold price drop. Money managers and hedge funds were beginning to sell off their gold positions and offering lower forecasts for the year and all of this became a major signal for traders to start a short trade on gold. The cycle continued right up through July when the gold net short positions reached record highs. Last month, August, and continuing if gold prices continue on this small bullish trend, the shorts will be left exposed and once they remain exposed in the reverse vicious cycle known as the “short squeeze”, the short traders will have a major problem at hand. The main problem for the shorts is that the gold they sold on the way down will not likely be for sale on the way up. These buyers much like the foreign central banks who buy physical gold to own it and not to trade it for any sale price, simply because, it’s not for sale. They can afford to pay for it, they can afford to hold on to it, and the buyers over the past few months have been lying in wait for this kind of opportunity to come around for years. What we all can really hope for is that the short squeeze this month and in the coming months becomes a major focal point to get the yellow gold metal back towards its previous highs of 1900. Not to mention the impending attack upon Syria and our US relations intermingling within their state Civil War adds to the case that I see for gold, which is grossly undervalued in this current unbalanced economic realm. If I’m right this might just be the beginning of the biggest rally on physical gold we’ve ever get to see.
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