Is China Challenging Gold Short-Sellers?
The United States government has been manipulating the price of gold since the Exchange Stabilization Fund (ESF) was established in 1934. One of the ESF's explicit purposes is to manage the price of gold.
As I have stated before, the prices of gold and silver are effectively report cards on the U.S. government, economy, and dollar. If the prices of these metals are rising, that is a negative signal for America.
It would be counterproductive for the U.S. government to be seen directly trading in gold markets. Consequently, its price manipulation tactics are conducted by other parties. Among these collaborators are the primary trading partners of the Federal Reserve Bank of New York, allied central banks, the International Monetary Fund, and the Bank for International Settlements.
One tactic would be to sell short paper futures contracts on the New York COMEX. Selling short contracts not backed by physical gold gives the appearance of larger gold inventories on the market than there are – helping to hold down gold’s price.
Although the U.S. government has access to the greatest resources to impose its will in international markets, it does have a significant weakness. If you combine the outstanding U.S. government debt ($34.945 trillion as of Thursday last week) with the net present value of unfunded liabilities for Social Security, Medicare, and related programs (depending on interest rate assumptions, the gross amount owed is somewhere around $200 trillion), the federal government is easily in the hole by at least $100 trillion. That makes America the world’s largest debtor nation. Also, when comparing what is owed in relation to Gross Domestic Product (GDP), the U.S. ratio is approaching 500 percent, by far the highest of any nation (Japan is a distant second highest in government debt divided by GDP).
The U.S. government’s extremely high debt and liabilities put downward pressure on the value of the U.S. dollar. It simply won’t be possible to pay off all of the debt and liabilities in U.S. dollars of the current purchasing power.
The competition for international dominance involves more than military actions. Financial clout can also inflict damage and chaos on opposing governments.
This year, demand for physical gold in China has been so strong that there have not been enough supplies to meet demand. To try to satisfy demand (with investment demand up more than 26 percent in the first quarter of 2024 compared to a year earlier), the public has been buying gold contracts on the Shanghai Futures Exchange. Also, a month or so ago, the Chinese government directed the nation’s media to urge buyers having difficulty finding the yellow metal to instead purchase physical silver.
Apparently, one Chinese company owns about a million ounces of gold contracts along with some silver contracts on the Shanghai Futures Exchange. As these contracts reach maturity, they ask for delivery of the physical metal. They are also asking for physical delivery of silver contracts as they mature. This is sharply different from the trading of futures contracts in the U.S., where maturing contracts are mostly exchanged for new contracts with delivery dates further in the future.
This company’s demand for delivery of physical gold upon maturity of a futures contract would magnify a supply squeeze for gold. This would put pressure on higher gold prices, leaving short-sellers of futures contracts in a growing loss position.
On June 25, 2024, the open interest in the COMEX gold futures market was 452,190 contracts, representing 45,219,000 ounces of gold. By July 19, 2024, the open position has soared to 584,673 contracts (58,467,300 ounces of gold). The additional short sales of 13,248,300 ounces of gold in less than a month represent over six weeks of global gold production. Each of these contracts has a party on the long side that owns it and a party on the short side that owes the metal.
Normally, when such a massive quantity of gold is sold short, its price plummets. That did not happen this time around, with the price reaching an all-time record high on July 16, 2024 (ignoring the impact of inflation on the money supply).
This Chinese company effectively controls more than $2 billion worth of gold. It is inconceivable that it could own such a large position without the Chinese government knowing about it and almost certainly condoning it. It is also entirely possible that the Chinese government may be collaborating with this company as a tactic to undermine the future value of the U.S. dollar.
When the U.S. government flexes its financial resources, almost no entity wants to be on the opposite side. Because of the weakness caused by the U.S. government’s massive debt and liabilities, it may be up against an opponent who has the financial wherewithal to overcome the federal government.
As this plays out in the coming months, it probably makes sense to maintain and maybe even increase one’s holdings of bullion-priced physical gold and silver.
Source: https://www.numismaticnews.net/