first majestic silver

The Coming Big Bull Market in Gold!

October 4, 1999

A lot of shorts must be wondering why the European Central Bankers decided to limit their Gold sales to not more than 400 tons per year for the next five years. Only the believers in the philosophy of the GOLD-EAGLE website know the answer. Any new visitors to this site should read the numerous articles written by various authors, since the Bank of England announced its plan to sell more than 50% of its Gold reserves.

The European Central Bankers did not make the historic decision (about Gold sales) to help the Gold Bulls. They also did not want the Bears to be slaughtered. I believe they had no other option. The speculators were hammering the market with scant regard to the demand-supply gap. If the Central Banks had not acted as they did, the effect of the imbalances would have been catastrophic. You are invited to read my previous article at this site This article was written about a month before the European Central Banks' decision. Anyone who acted upon the views expressed in my article would have indeed made a killing last week.

Now the important question: Is the recent move a bear market correction, or is it the start of the BIG bull market in Gold?

I feel the Big bull market has started - and we are likely to see very steep moves on the upside. A limit up ($75 /oz) on Comex in the coming month or two can not be ruled out . Following are the reasons for my opinion :

  1. Due to the leasing game which has been going on for last several years, the amount of speculative Short position in the physical market far exceeds the speculative Long position. Very few Longs could have survived the bear market of last two decades. Those who survived must be holding their positions at very high costs. So even if we assume that all Longs decide to liquidate their positions, all the Shorts can't cover their positions. For this reason alone, I believe, those Shorts who decide to fight the trend would be ultimately wiped out.
  2. Before the recent historic announcement by 15 Central bankers, the producers were being forced to hedge their future mining to remain in business. Now most of them will want to buy back their hedges as they now know that at a Gold price between $300-$400, the supply will continue to be lower than the demand (recall that even when the POG was $400/oz the demand was more than mining supply). They know if all of them head for the exit, there will be stampede - and none will be able to cover. So as long as is possible, they will want to buy on dips. They can wait to cover their hedges because they have borrowed gold against their below ground reserves, and do not have to meet margin calls. After a few days of consolidation, the price is likely to break out on the upside AGAIN. It is then that the producers will panic.
  3. Big spec traders and bullion Banks who are caught short, usually have huge amount of reserve dollars to back their positions. Consequently, they may decide to use their reserve money to fight the upward price trend. HOWEVER, I am sure they do not realize (else they wouldn't be short against the demand-supply fundamentals) that once the sentiment reverses, the game is over. Soon, one or the other big Shorts will be forced to cover -- and as a consequence, some big trader or bullion Bank will default. That would be the beginning of the end.
  4. Many traders were waiting for the right opportunity to go Long. These new bulls are going to accumulate and buy on all dips. Soon this new buying will hit some stops.
  5. I believe there are huge derivative open positions in the Gold market. Most of the big players are in the habit of writing options. Heretofore, these players were rewarded year after year. Some of them believed (and still do) that nothing could go wrong with their mathematical models. However, big moves in any one direction have in the past busted a lot of such models. History often repeats.
  6. The buyers of Gold jewelry (Indians and Asians) don't care what the short-term POG is. They always look at Gold as a Store of value. The cost of jewelry is 20 to 50 % higher than its value in Gold so the notion that at significantly higher prices people will start selling their Gold is misleading.

In the end I want to remind the readers that to defend a Long position taken at $400/oz, you need $400. While to defend a Short position at $400/oz, you need an oz of Gold.

It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.
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