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Ing:  “What we are seeing today in the gold market is very technical in nature.  Today is an option expiration, and over the past two months there has been a buildup in the demand for physical gold, and this is against the backdrop of an increase in shorts in the derivatives side of the market.

So there is a squeeze going on with an option expiry, and together with the events in the Middle-East, there appears to be a lot more room on the upside than there is on the downside.  As you know, each month there is an option expiration, but what we have seen in recent months is a growing demand for physical gold....

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“Much of this demand is coming from China which is on pace to buy 1,000 tons, and will in fact be the largest consumer of gold in the world.  We also have the central banks themselves aggressively buying gold.  In the month of July we had Russia, Turkey, and others, all buying physical gold.

There is this great demand for physical gold, but at the same time there is a shortage.  Right now in India there is a $22 premium.  This is because India is experiencing a shortage of physical gold.  So while there is a lot of paper gold, and this is what is in the process of being corrected in the market, the paper players are getting squeezed by the demand for physical.  This has meant the price has only had one way to go because of the enormous demand for physical gold, and that’s been bad news for the bears who are short on the paper side. 

Overshadowing all of this we have seen a plunge in the supply of new gold.  One would think with the price drop in gold that there would have been a lot of inventory for sale.  But the reality is that there is less and less gold coming from recycling, and less and less gold coming from the gold producers.  So demand for physical gold remains quite robust, while the supply is shrinking, and this can only mean one thing -- higher prices.”

Eric King:  “Keith Barron and, very recently, William Kaye have been warning about the plunge in gold mining production and the impact this will have on the gold market.”

Ing:  “The average cost of production for gold is more than $1,200 an ounce.  So, for those who say that gold could go down to $1,000 or even lower, they just don’t understand the producer side of the gold market.  They can’t make money at $1,200 an ounce, much less at $1,000 an ounce.

So the reality of the cost of production has put a floor under the price of gold.  Meanwhile, a lot of the big gold projects such as Barrick Gold’s Pascua-Lama project are being shelved.  They are not going ahead.  So the fact that these large projects are being shelved, what this means is that the price of gold is going to have to get back up to $1,900 in order to have companies even consider these large projects. 

It costs billions and billions of dollars to fund those projects, and there is no way those projects are moving forward with the price of gold anywhere near current levels.  So we are in a vacuum here, where the room in the gold price is going to be much bigger on the upside than it is on the downside.”

Eric King:  “John, many have argued that gold never should have broken down from the $1,500 to $1,600 area.  Their feeling is that the move down in gold was engineered by Western governments because the LBMA was in danger of having its fractional gold reserve system completely collapse.  This manipulation has clearly backfired on Western governments.  Now that gold is recovering, how do you see this market trading in the future?”

Ing:  “Well, one thing about following the gold market for as long as I have (43 years), I remember, as you do, when the price of gold was $35 an ounce.  Then, we were told that $100 was the peak.  Then, when gold broke over $200 an ounce, and Americans were finally allowed to buy gold, that was when the price of gold was supposed to go though the roof.  Of course the next day the gold price began its historic collapse where it lost roughly 50% of its value.  So, then they told us that was supposed to be the peak.

If you remember just a few years ago, we were being told that gold was never supposed to see the 1980 high of $850 ever again, and yet hear we are today trading above $1,400.  Now, we are being told by the mainstream media that $1,920 gold won’t be seen for another generation.  I’m not sure whether $2,000, $2,500, or even $10,000 is going to be the peak for gold at the end of this cycle.

I can recall being in a bear market in gold for 20 years.  We have only been in this bull market in gold for about 12 years.  So we should expect to see a 20 year bull market, which means we are only about half way through this current bull market in gold.  This means we have a lot of room on the upside still to go.”

Eric King:  “John, I just want to circle back to this issue of there being a shortage of available physical gold.  The fact that entities are having difficulty buying physical gold in size right now, is that why you say there is so much room on the upside for gold, because it’s just not available (in size)?”

Ing:  “One of the reasons for the collapse in gold, and this war between the physical gold and paper gold market, is related to the unintended consequences of quantitative easing and the fact that borrowing costs are essentially at zero.  This has meant that a lot of the central banks and bullion banks have introduced trillions of dollars of commodity derivatives, particularly in gold, and they are now essentially ‘floating’ around. 

The problem is that because of all of this tremendous physical demand for gold, and the fact that there is too much paper ‘floating’ around, whether it’s paper barrels, paper copper, or paper gold, one of these days this squeeze is going to bankrupt the counterparties.

This is why you have to look carefully at these big banks, hedge funds, and big trading houses.  To them, they all view these commodities the same way, it’s just a cost to carry.  But what’s happening right now is that in the physical world the demand is so extraordinary that we we have this backwardation in gold as an example.  This means that there is a squeeze going on in the gold market.

There was simply too much ‘paper’ that has been put out there, and now it is quite clear that there is not enough physical gold backing that up that paper.  So my expectation is that over the next few months, every option expiry, as we approach each of them, we will see a short squeeze in the price of gold, and that means significantly higher prices as we move forward and the squeeze in gold accelerates.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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