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.
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?
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