Hathaway:  “Eric, I still think we are dealing with a shortage of physical gold vs the enormous amount of paper claims.  Of course we are seeing a bit of backing and filling in gold as August comes to an end, but I think this story is going to keep coming back.

Entities who have paper claims, whether it’s futures contracts or derivatives -- where you have banks or the COMEX as the intermediary -- are going to say, ‘Hey, I would like to have my gold in a more secure situation.  This means getting possession of their physical gold in a non-bank vault....

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“So there will be an increased demand for storage and vaulting needs outside of the banking system.  This will drive the gold price higher over time because the leverage of paper claims to physical gold is at least 100 to 1.

The second thing I am focused on is this business about the Fed, meaning, how do they ‘exit?’  My view is that they will reduce their purchases sooner rather later.  But I think that’s already been priced into all of the markets, equity, bond, and gold.  So that will be a non-event when it actually turns out they have reduced their purchases of Treasuries and mortgage-backed securities.

But then the question is, ‘Where do we go from there?’  Reducing the purchases means that the Fed’s balance sheet is still expanding.  So the overhang of Fed liquidation of Treasuries and mortgage-backed securities won’t go away just because the Fed will have taken this first baby step.

I know Bernanke, because he’s leaving at the end of his term, just wants to have taken this token first step of reducing purchases, even though it still leaves the Fed with this overhanging problem.  So I think those are two of the major themes that will be with us throughout the remainder of the year.

The Fed has painted itself into a corner, and Bernanke is going to leave a pile of problems for the next Fed Chairman.  I strongly believe this means that the Fed will implement ever-greater financial repression.  It wouldn’t be far-fetched to see exchange controls and forced purchases of government bonds in pension plans.

All of this will be ‘justified’ because the U.S. will be in a much more dire economic and market environment.  In other words, these will be ‘emergency’ measures.  All of this will lead more and more entities into owning physical gold and storing it outside of the banking system.”

Eric King:  “John Ing and Grant Williams were speaking with KWN this week about this squeeze that we are seeing in the physical gold market.”

Hathaway:  “J.P. Morgan keeps getting called for delivery of registered gold.  Their inventories are way, way down.  So we have seen a precipitous drop in registered COMEX gold, which is the category of gold that would be called away for a futures contract delivery request.

There is more gold in the COMEX system -- we have 3 tons of gold but it’s not ‘registered’ gold.  So this gold is not available for delivery.  But if you look at that registered category of COMEX gold warehouse stocks, it really is perilously low at this point.

So we know we have a physically tight gold market, and this has typically set the stage for higher gold prices.  Investors have to take a step back and ask, ‘Why would people want to have physical gold?  Why would they demand delivery?’  The reality is this is a matter of trust, or in this case a lack of trust (regarding the Western fractional reserve gold system).

So the more suspicion there is of these intermediaries, the COMEX, the LBMA, banks with structured notes, this lack of trust on the part of entities with paper claims means that they want to get their hands on their physical gold and get it out of the system.  In other words, trust is breaking down in the system.

And because you have this huge pyramid of credit, which is based on a very small amount of physical gold, this run on physical gold can spread very quickly.  In a way it can be like a run on the gold bank.  We have seen a very slow version of this throughout the summer, but if that should pick up steam for any reason, these are the exact mechanics of why gold could spike to the upside far more than anyone is betting on right now.”

Eric King:  “What kind of a price spike in gold are we talking about here, John?”

Hathaway:  “Look at how fast gold plunged on the downside when these various entities ganged up on gold.  They drove the price of gold lower as they were continually hitting stops.  What happened on the downside can happen now on the upside.  So we are talking about a move in gold that will be hundreds of dollars to the upside, in very violent trading, and in a very short space of time.  None of the market participants would be prepared for this type of action.

The bottom line is that the situation in the gold market is so precarious right now that if entities demand their physical gold be delivered, and they put additional pressure on these intermediaries (COMEX, the LBMA and various banks), we will see some extraordinary fireworks to the upside in the gold market.”

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Eric King

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