[Sir] Alan Greenspan Is Still a Gold Bug at Heart

The Far East action on Wednesday morning was much more subdued than Tuesday's activity. Volumes, although elevated, were nowhere near the extremes of the previous day. Gold had it's high of the day at 3:00 p.m. in Hong Kong's afternoon...sold off about $10 into late-morning London trading, but managed to make it back slightly over the $1,000 mark by the close of London trading at 10:00 a.m. in New York. From there, and starting around noon, gold got sold off about $13 to it's low of the day [$986.70 spot] during post-Comex trading in New York... although it did manage to recover some of that loss going into the close at 5:15 p.m.

The silver price had another roller coaster ride during trading in all markets yesterday. It's high of the day was actually in early morning trading in Sydney. It, too, headed lower starting at 2:00 a.m. New York time [3:00 p.m. in Hong Kong]. The low price for the day was close to the London silver fix... 12:00 noon in London and 7:00 a.m. in New York. From there it staged a spirited rally...almost making it back to the Sydney high of around $16.70. But, just like gold, heavy selling began at noon in New York... and by the time the smoke cleared, silver was almost back to its London lows.

Open interest numbers weren't quite as bad [at least not in gold] as I was expecting in my commentary yesterday... but they were still bad enough. Gold o.i. rose another 13,209 contracts to 451,713... on enormous volume of 181,199 contracts. Silver's o.i. increase was a whopping 3,003 contracts. Open interest is now up to 116,421 contracts. Yesterday's volume in silver was 35,943... which is a lot. These open interest numbers are depressing. I'm not a happy camper... and neither is Ted. The net short position in gold is now pretty close to 29 million ounces, which represents another all-time record high.

The Comex Delivery Report indicated that only 49 gold and 5 silver contracts were delivered yesterday. There were no reported changes in the alleged holdings of either the GLD or SLV... but the U.S. Mint finally put some production numbers on the board for September. Yesterday they reported that 34,000 gold and 450,000 silver eagles were minted. There was also a fair amount of activity over at the Comex-approved warehouses yesterday as well. There was movement in every depository... and by the time the smoke cleared... 789,535 ounces of silver had been withdrawn.

The usual New York gold commentator had the following yesterday... "Standard Bank remarks that its 'physical flow index' has turned negative, and that they are seeing some scrap sales. But the salient fact about the chart they show is how slight the negative move is compared to the deeply negative standing when gold was this high in Q1/09."

"Experienced observers are quite shaken by the Barrick announcement. While there is a bullish long-term inference, there is the poor example of the company's early '96 buyback [not '94 as I said last night--senior moment!] and, of course, there is the probability that a good deal of the order has been executed [or front run]. UBS, which was making negative gold price noises yesterday, goes as far as to say: After a lot of consideration and thought, we now conclude that recent buying from Barrick probably contributed a lot to the move in gold over the past week... The performance of gold in European trading suggests that gold market participants have decided that Barrick bought all the gold it needed before yesterday's announcement and this event is already in the price... for now, we hold our view that gold is overdone at current levels." [I must, unhappily, agree - Ed]

"This is simply one of those situations where the pudding will have to be eaten to find out. Today, gold's attempt to rally out of European weakness on the Comex open was eventually stopped and turned back by heavy selling: ScotiaMocatta describes the latter part of the day as 'well offered'. December gold finished down $2.70 at $997.10 with estimated aggregate volume being 118,901 lots. Activity was reported high throughout the floor session."

"Possibly veteran observers, including me, were not correct this morning in paying such attention to the possibly transient nature of the buying stimulated by memories of the 1996 Barrick peak. Yesterday's [Tuesday] open interest underlines the fact that the real story continues to be the immense selling gold is encountering: can it be sustained? Based on today's limited damage--and surely any hedge buy-back would now be playing for lower prices--the Bears may still be in difficulties."

Well, the Barrick story was all over the news yesterday. My first two offerings of the day deal with exactly that. The first was a story posted at mineweb.com. The author, Dorothy Kosich, said... "With Tuesday's announcement by Barrick that it was eliminating gold hedges and floating contracts, a 21-year old policy--which transformed the former one-gold mine company into a global gold mining success, but subsequently was derided by analysts, investors and GATA... may finally be put to rest." The headline reads "After 21 years, Barrick will finally wean itself off gold hedging" and the link is here.

The second story on this subject is from the globeandmail.com This story is also worth the read. The headline reads "Barrick raises share offer to $4 billion"... "Sources said that in meetings with investors, Barrick's CEO quickly came to realize that the hedge book was an enormous issue facing the company and should be eliminated. “Every institution Aaron met said, ‘Get rid of the hedge book,'” said one banker close to Barrick"... "Barrick is a gold company that has forged its reputation on clever financial engineering more than a belief in metal prices." [If you only knew the whole story, dear reader, you'd never own a share of that company. - Ed] The link is here.

The next story is one that David Galland used in his Wednesday commentary at Casey's Daily Dispatch. But it's so important that I thought I would run it in my column as well. As I've been saying for several years, the second shoe to drop in the residential housing debacle, would be the Option ARM... and it has just hit the floor. Option ARMS... 70% of which will reset in the next two years... are weapons of financial destruction that have already detonated. The story, which isn't particularly long, is a must read. I thank Craig McCarty for sending it along... and the link is here.

Here's Credit Suisse ARM graph. Month one is January 2007. We're at month 33 right now.

The last story is also courtesy of Craig McCarty. This is a Bloomberg piece. I normally don't go out of my way to quote Alan Greenspan... but I'll happily make an exception here. The words that he utters are blasphemous in the hallowed halls of fiat currency. The headline hints, but the quotes from Sir Alan in this 6-paragraph story are astonishing. When he told Representative Ron Paul [R-Texas] many years back that he would never change a word of his Gold and Economic Freedom essay that he wrote for Ayn Rand in her 1966 book Capitalism: The Unknown Ideal... it appears that he wasn't kidding. The story, which is headlined "Gold Rally Signals Move Away From Currencies, Greenspan Says"... is linked here.

What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment. - Alan Greenspan, Bloomberg, 09 September 2009

I have nothing to add to what I said yesterday. The bullion banks continue to run their gold short position into the stratosphere. There are only two ways out... they instigate a sell-off and then pull their bids and the price crashes and burns until the specs longs are forced to puke up their positions so the bullion banks can cover. Or the bullion banks get blown out of the water with a full short position on. It's only the timing for either eventuality that's unknown.

The gold and silver prices are looking rather sloppy here... and, regrettably, I now have to lay my bet on the former outcome rather than the latter. But I'd love to be proven wrong.

See you on Friday