Will Gold Hit $3,000 by End of 2015?|
November 25, 2013
Two significant developments hit the precious metals markets last week. One was expected and one is a real eye-opener.
The expected news was a new round of gold and silver major price suppression, which will likely continue unabated through the release of the U.S. Non-Farm Payrolls Report on Friday, Dec. 6. There are a number of events beginning last week through Dec. 6 which are either standard times when precious metals prices are “suddenly” clobbered or are opportunistic times to manipulate prices during thin trading periods.
The times of pretty consistent price suppressions are going into COMEX gold or silver options expiration dates, where both metals saw their December 2013 contracts expire Monday, Nov. 25. December contract expirations are more important than most other months as the volume is much heavier. Then the First Notice of Delivery for maturing December 2013 gold and silver futures contracts is Wednesday, Nov. 27. Then this coming Thanksgiving weekend is effectively a four- or five-day holiday weekend that normally experiences such thin trading that prices are easier to suppress than usual. Then the jobs report comes out Friday morning next week.
The U.S. government has a strong interest in gold and silver prices being lower when options expire and futures contracts mature. The lower the price drops, the fewer ounces of precious metals that investors will opt to take physical delivery. If there is less demand for physical gold and silver, there will be less of a supply squeeze which could push up prices.
I had previously stated that there may be one more major attempt to knock down gold and silver prices. If it were to occur, I predicted it would happen before the end of 2013. Although the ultimate bottom may not occur until next week, I consider the current price drop to be possibly the final opportunity to acquire physical metals at bargain prices.
The sequence of the latest price attack came on right on schedule. Last Wednesday, the COMEX did its part by dropping margin requirements for gold and silver. That made it easier for short-sellers to use greater leverage for their price suppression efforts. Normally, the COMEX only drops margin requirements if trading volume is declining, but that is definitely not the case this month.
Once the COMEX dropped its margin requirements, a single sale of 2,000 COMEX gold contracts was dumped onto the market last Wednesday. This transaction of 200,000 ounces of gold (amounting to more than $250 million in value) knocked down the price of gold $10 and led to a temporary halt of COMEX gold trading.
As I have explained before, private parties looking to sell large quantities of gold would want to realize the highest possible selling price. Selling a single large lot of gold in the COMEX is exactly what such a seller would not do, as that is a strategy to realize the lowest possible price. Instead, a large seller would split a sale among multiple brokers, none aware of the actions of the other brokers, unloading portions of the sale in different markets, taking 24 or more hours to conclude the liquidation.
So, the suppression of gold and silver prices happening right now is simply standard operating procedure for the US government, its trading partners and central bank allies.
The surprise development last week occurred in the COMEX gold options market. Last Wednesday, the December 2015 gold options contract with a contract price of $3,000 per ounce was the most actively traded contract of any month and of any contract price level. About 7,250 call option contracts were purchased, signifying potential physical demand for 725,000 ounces.
Those who own call options of this contract would have the right to purchase 100 ounces of gold at the contract price on the expiration date in late November 2015. However, it is not necessary for those who purchased these call options at $3,000 to wait for two years or to need gold to reach $3,000 in order for them to make potentially huge profits.
If, for instance, the price of gold reached $2,000 by the middle of 2014, these call options would be worth several times what they are worth today. Still, the closer that gold’s price gets to the $3,000 level before late 2015, the value of the December 2015 contracts would rise exponentially. The December 2015 COMEX gold option $3,000 call contract closed Nov. 22 at $3.20—effectively at $0.032 per ounce of gold. If the price of gold were to rise to about $3,000 at the maturity date, contract owners would receive almost $3,000 per ounce of gold or nearly $300,000 per contract.
The purchase of this large quantity of $3,000 gold call options at the December 2015 maturity date may be unprecedented. Obviously there are an unknown number of investors that anticipate a significant rise in the price of gold within the next two years. Time will tell whether today’s gold and silver prices indicate what prices may languish for the next 24 months or if the prices of both metals will explode upwards. Personally, I anticipate the latter will be nearer the mark.
Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com. Other commentaries are available at “Coin Week." He also writes a bi-monthly column on collectibles for The Greater Lansing Business Monthly. His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing.
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