With tremendous chaos taking place around the globe and incredible volatility in the gold, silver, and oil markets, today one of the greats in the gold world told King World News that the bullion banks are now scrambling to find metal in order to cover their shorts. John Hathaway of Tocqueville Asset Management also said that many bullion banks’ balance sheets may be in great peril if gold and silver prices begin a massive surge.
Hathaway: “It’s so hard to know in the short-term where the price of gold is headed, but it just seems to me that this is all a process of bottoming. When you look at the bigger picture, you’ve got an inverse relationship between financial assets and gold. I see the market is at record highs but underneath that you see technical deterioration. You also see the U.S. Dollar Index moving higher and this is pushing more funds into stocks because of index buyers and capital flight from Europe and Japan.
And I think the opposite of that trade is for gold to be under pressure. But we are reaching an inflection point where those trends will reverse and investors will start to lose confidence in financial assets, the Fed, and central banks in general….
Continue reading the John Hathaway interview below…
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“They will then look for a place to go and gold will benefit from that. So that’s the big picture that I see.
But for those of us who follow things on day-to-day basis, what is going on in the physical market is remarkable. The physical market is incredibly tight and you can see this in gold lease rates, GOFO, and that kind of thing. That tells me that the link between paper and physical gold is being stretched to the limit and perhaps to a breaking point as bullion banks scramble to find metal to cover their shorts. That’s something you have to watch very carefully.
And I think the bullion banks, we are talking about entities such as Deutsche Bank and JP Morgan, are financially vulnerable to a big run up in the gold price. Who knows what’s in their derivatives books? I noted this week that Deutsche Bank’s derivatives book was a staggering 20-times the GDP of Germany. And nobody knows what’s in it, but some of it involves precious metals.
My guess is that a decent move to the upside in gold and silver would make Deutshce Bank significantly offside, and possibly imperil their balance sheet. And I think that’s probably true for some of the other big bullion banks. So I also think that’s a big deal that you have to watch very carefully.
And last I would note that there is significant litigation in the wings. I know there are many contributors in the case involving manipulation. This is probably going to be resolved in a couple of weeks, in the middle part of December. This will determine whether these legal enquiries and complaints can proceed to the stage of deposition and discovery.
I’m rooting for that big-time. Obviously I don’t know what’s in the mind of the judge that will make that decision, but I would love nothing better than to get some of these bullion bank traders on the witness stand to finally expose what has been going on. Maybe it won’t get that far because the bullion banks will simply settle. In some ways that would be a disappointment to me, but that’s also potentially a very big deal. We will just have to see how the judge rules in a couple of weeks.”
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