Following 3 years of accommodative monetary policy by the US Federal Reserve who have expanded their balance sheet to nearly $4 trillion in order to keep borrowing costs for the US government at record lows and ignite a self sustaining recovery, gold prices in the early stages of this experiment were very buoyant, rising to nearly $2000/oz into 2011 as investors viewed the precious metal to be an effective hedge against potential inflation that could be generated by such policies.

Now, after a 12-year bull run, gold has posted a decline of over one third from its record high and a decline of around 26% YTD, having crashed on several sessions by more than 5% within a single-day. With the latest comments from “Helicopter” (perhaps no more?!) Ben Bernanke anticipating a retreat from the current $85 billion per month bond purchase package the FED has been running, it is perhaps no surprise that investors have been dumping some of their gold holdings. But, we wonder if this potential cut back on the quantitative policy adjustment justifies the loss gold has been experiencing. The other day, we stated in our blog ( that the marginal cost of producing gold has been estimated near $1,287 for 2012. Now think on yesterday’s close at $1,250 – are miners now producing gold below cost? Something will have to give and we believe this is in fact a consolidation opportunity.

Separately, gross Comex shorts are at an all-time high while net long positions are at depressed levels. Gold closed yesterday’s session at $1,250 recovering from year lows of $1,1769 last Thursday as aggressive selling has put the precious metal under intense pressure. Actually, that is aggressive futures selling as physical demand for gold continues to increase, with buyers out of India and China in particular accumulating as much as they can. That’s interesting in that we have a dichotomy… Speculators are selling in futures markets driving prices down but physical demand doesn’t stop. Something doesn’t add up…

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The price of gold, as we know it, is the spot or futures price taken from the Comex market. It is based on futures trading and not on physical buying. The size of this futures market is so large that it surpasses by a factor of 100 times the actual physical gold available. As investors are able to demand physical delivery of gold at a contract expiry date, if they believe futures and real gold are out of sync they could force delivery and if they do that, gold would certainly in dramatic as there would not be enough gold available to fulfill every contract.

Given that the futures market is a leveraged market however, and every speculator uses margin to buy 5x, 10x, or even 20x the exposure relative to their initial funds in gold contracts, they of course don’t have the funds to pay for actual delivery so most of them just close the contract before that happens. This way sellers of the gold are able to roll their contracts pretty much indefinitely.

With the rising interest we have been seeing for gold coins, central banks buying gold out of Asia specifically and with ‘natural2 demand rising again, ie for jewellery etc, the decline in the price of the yellow metal has now moved to a level where, in our opinion, it is no out of kilter with the fundamental picture, let alone the heavily oversold status. The futures market is simply disregarding the fundamentals and we expect an adjustment will happen in the short term in which gold will rise substantially from current levels. So convinced are we of the opportunity in the gold mining sector that we have set up a dedicated fund at our sister company Titan Investment Partners and we began deploying capital into the very sharp decline in these stocks seen over the last few weeks. Click the banner below for more information.

If you are a buyer of the physical, it just may be the case that you have some Wall Street broker knocking on your door asking for your gold in the near future, paying any price for it, to fulfill some futures contract… The market for gold looks to be being manipulated at present but, if history is to repeat, these  attempts always end with misery for the perpetrators (see the Feb edition of our magazine for a special feature on this –