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Hugo Chavez might have one foot in the grave and the other one on a banana peel, but that hasn't stopped him from causing what is shaping up to be a massive short squeeze in physical gold. The (democratically elected) Venezuelan dictator began the process of repatriating over 400 tons of the yellow metal last week, most of which is held for safekeeping abroad.

Gold went over $1,900 an ounce yesterday.

The U.S. holds a massive amount of foreign gold for safekeeping. So far it looks like only JP Morgan is exposed to the Venezuelan repatriation, with an estimated $807 million of Venezuelan gold in their vaults. But what if this is the beginning of a trend? What if more countries ask us to ship their gold to them? It's no secret that the Fed monkeys with the gold in storage, lending against it and so forth. But there hasn't been an audit of the gold in storage in decades.

What if there's no gold in Fort Knox?

Futures contracts on gold account for more than 100 times the amount of physical gold on the planet. If the U.S. has to scramble to buy gold back to meet the demands of foreign gold redemptions, $5,000-an-ounce doesn't look so unrealistic anymore.

And just so you don't think I'm making this up, there are volumes worth of speculation that the gold is no longer here. Probably the most high profile skeptic is Ron Paul, who has been demanding an audit of Fort Knox for years.

Quote:
Paul isn't so sure the nation's supply of gold is all accounted for and thinks it might not exist at all. He has introduced legislation that would require an independent count of the 5,000-plus tons of gold bullion that's sacked away in the Kentucky vault, as well as smaller amounts held in government facilities in Denver, West Point, and New York City. Paul also wants a lab to test the bars, to prove it's as pure as the U.S. Treasury Dept. says.

For those interested in a fascinating analysis of what this repatriation potentially means, CLICK HERE. That's one of the best reports I've read in a while.

The long and short of it (no pun intended) is that there is no way you should be short gold here. Yes, I know it's at an all-time high, but it's just not worth the risk. Even if every ounce of gold is right where it's supposed to be, a wave of redemptions will cause massive short covering on the futures market and force the price even higher.

I could be wrong, but is it really worth the risk?

Comments (25)

  • fitzmanon's picture

    Edmundo Braverman wrote:
    The Venezuelan dictator

    Not really a model of virtuous governance but last time I checked he had been elected democratically with elections supervised by the U.N.

    'Oh, yeah, that's right. That's what's it's all about, all right. But talkin' about it and bein' it, that's two different things.'

  • happypantsmcgee's picture

    He looks like one of those reformed gang members that goes to give speeches at high schools before they violate parole and go back to prison in that picture. Seems appropriate.

    If I had asked people what they wanted, they would have said faster horses - Henry Ford

  • In reply to Edmundo Braverman
    fitzmanon's picture

    Edmundo Braverman wrote:
    fitzmanon wrote:
    Edmundo Braverman wrote:
    The Venezuelan dictator

    Not really a model of virtuous governance but last time I checked he had been elected democratically with elections supervised by the U.N.

    Sean Penn? Is that you???

    lol

    You are correct, he was democratically elected and my characterization of him as a dictator is off base. I amended the original post to protect his delicate sensibilities.

    :) He will appreciate ...

    'Oh, yeah, that's right. That's what's it's all about, all right. But talkin' about it and bein' it, that's two different things.'

  • In The Flesh's picture

    I wonder Eddie, under what conditions would foreign nations start to demand their gold back? As long as people think it will still go higher, they'll still want to hold onto it, won't they? And aren't most commodities represented by many times their physical supply in futures contracts? I'm genuinely curious.

    Metal. Music. Life. www.headofmetal.com

  • Edmundo Braverman's picture

    Well, I think Chavez's end game is to do what he can to undermine the dollar and to move assets from unfriendly Western nations to his buddies on the other side. I'm not so concerned about this particular move, but if other countries start asking for the gold it could become a big problem quickly.

    Think about it: If Venezuela repatriating ~70 tons from England drives the price of gold up over $100 an ounce in a week, how many other countries have to be looking at that and wondering what's up?

    As usual, no one wants to be the last one out the door turning out the lights.

  • IlliniProgrammer's picture

    It's ok, the UFOs have it safe and sound- along with Walt Disney's body- on Mars.

    Seriously, we audited the fed and no funny business came up. Time to let this go.

    Gold looks to be in a bubble like oil was in 2008. You'd have to be crazy to short it, but this may be a good time to pick up some puts or bear spreads below spot

  • TheKing's picture

    Illini:

    I don't think we can say that no funny business came up, considering that the Fed lent billions to foreign banks at extremely, extremely low interest rates. They gave money to a bank in Libya! The Fed gave money to fucking BMW's finance arm!

  • In reply to AndyLouis
    blastoise's picture

    AndyLouis wrote:
    ha i always knew there wasnt enough gold in knox to back up all the gold, but didnt realize there wasn't enough gold in knox to back up all the gold in the market, ridiculous, how did it get this way?

    Leverage, it's the same thing when people do naked shorts. Companies only want X amount of shares in market, but do to naked short selling the shares available go to X + Y in a sense.

  • In reply to TheKing
    accountingbyday's picture

    TheKing wrote:
    Illini:

    I don't think we can say that no funny business came up, considering that the Fed lent billions to foreign banks at extremely, extremely low interest rates. They gave money to a bank in Libya! The Fed gave money to fucking BMW's finance arm!

    Seriously?

    Is that why BMW is able to offer 1.25% financing on new purchases? Glad to know I indirectly subsidized some dude's new beemer.

  • blastoise's picture

    No way is shorting gold worth it. The problem is you just don't have just traders in the market, you have the moronic middle class thinking the world is coming to an end buying that shit up. Jesus, thank god OIL is considered a hazardous resource and normal joe can't store it in the back yard.

    If it wasn't for idiots on fox news(Glen Beck) pumping up the US is failing so go buy gold coins we shorts would have slaughtered this shit and it would have been nasty.

    It's ok though all it takes is one hedge fund to implode off equity positions and then dump all its gold holdings in liquidation then the chaos will begin. My bet is it will be a HFT fund that is forced to unwind due to do some regulatory crap.

  • IlliniProgrammer's picture

    Honestly I have no idea why people put such a high value on "ooooh shiney".

    If I believe the world is coming to an end, I am going out and stocking up on boxes of (store brand) pasta and Brita water filters. Why don't we bid that commodity up instead? Grain was the world's first currency, used by the Babylonians for a thousand years before people let go of their source of sustenance as currency for "ooooh shiney".

    At least oil and gasoline are worth something to consumers. If you are truly betting on an economic breakdown, you want to buy a bunch of pasta, rice, spam, Brita filters, and MREs along with an island in the Pacific (or for frugal dutch types, an island in Lake Superior). You don't want to buy gold. Gold just makes you a target.

    A lot of smart technicians, including long-term bulls on gold, are calling for a retracement. Eddie, why is it that you always recommend trading against the technicians with incredible conviction and always wind up getting creamed?

  • In reply to IlliniProgrammer
    UFOinsider's picture

    IlliniProgrammer wrote:
    It's ok, the UFOs have it safe and sound

    Fo' real, we don't have it

    On a more serious note:

    Chavez just wants to bring the gold back so he can plunder that resource now that he's ruined every other facet of the economy down there. He's trying to find a way to stabilize and legitimize the rotten system he's built, and so the end game of his incompetence is to blame the dollar and peg his currency to gold: but it won't work because gold backing is an obsolete technology - let Chavez sit on a lump of metal, it's not going to change anything. The best thing he could do would be to trade it for chachkies made in China, but even that isn't going to solve anything because once gold goes into China, it doesn't come out easily.

    We have a functioning fiat system, despite the best efforts of the Becks, Pauls, gold bugs, conspiracy hacks, anti-fed ideologues, and other assorted circus side shows. I know everyone likes these guys beause they promise zero taxes, no rules, and streets paved with gold but I'm not buying what they're selling. As for Hugo's election: the first thing once in office was make it impossible to have any more real elections, so the UN can lick my crack when it comes to legitimizing him beyond round one.

    One last thing: given that the whole foray into the new world several hundred years ago began with plundering the gold of South America, I find it mildly ironic that in this point in history their AU is going back to the home of the sun gods. The symbolism is kind of strange. There's probably no point to this observation, it just jumped into my mind.

    Get busy living

  • In The Flesh's picture

    Gold is seen as valuable because people believe it is, even if its practical uses ("ooohhh, shiney") are fairly limited. As long as it has its illustrious history, gold won't just be "another metal."

    Illini, obviously other people aren't as practical as you are. I like that your post just screams "thrifty Dutch Calvinist." But exactly how does buying gold make you a target if you can resell it at a profit later?

    UFO--you guys don't have Amelia Earheart on Mars by any chance, do you?

    Metal. Music. Life. www.headofmetal.com

  • IlliniProgrammer's picture

    Quote:
    Illini, obviously other people aren't as practical as you are. I like that your post just screams "thrifty Dutch Calvinist." But exactly how does buying gold make you a target if you can resell it at a profit later?

    You buy gold because you are worried that your paper currency will become worthless. Often this is because of a failure of government and civil unrest.

    During a riot or a revolution, the first place to get hit is always the jewelry store. They're not in there to steal the DeBeers brochures. If you are buying gold on the expectation of a weakening of the federal government and civil unrest coming to America, just know that you're buying a liability rather than an asset.

  • accountingbyday's picture

    I haven't touched Gold, but my SLV calls, which were paying me handsomely over the past 7-10 days, just took a total shit on me. I'm out and I hope SLV drops 30%, then I can rebuy and make more $.

    In all honesty, I kind of agree with IP (as usual, must be the dutch calvinist in me), seriously why is gold money? I invest in it because everyone else invests in it, but why is it really considered the ultimate money? If things got so bad that we threw out the dollar and reverted to gold I'd rather have cows, chickens and AK-47s than a shiny piece of medal.

    This feels similar to the old Netherlands Tulip bubble, except we all buy into it because gold is "money". What if gold was just a shiny rock like tulips are just flowers?

    btw - I'm not saying don't invest. I'm hoping to get back in SLV if the price is right. I just think its all stupid from a rationality standpoint, but that doesn't mean its a stupid investment.