By Patrick A. Heller October 05, 2009

After settling on the COMEX above $1,000 for nine consecutive trading days, the price of gold was knocked down below that level at the close on Thursday, Sept. 24.

It was no accident that it happened exactly then.

First, there was a meeting of G-20 officials in Pittsburgh that began that day. The weakening U.S. dollar was certainly one of the major subjects. Because of the US dollar-destroying fiscal and monetary policies adopted over the past two years by the current and preceding administrations, a weak dollar has become a huge concern to other nations. Since the price of gold is effectively a report card on the strength of the dollar, gold’s price “had” to go down during the meeting to help the U.S. government’s negotiating position.

But that wasn’t the only reason the price of gold had to go under $1,000 that day. Sept. 24 was an options expiration day, with over 4,300 gold call contracts with a strike price of $1,000 per ounce. Had the price of gold settled over $1,000 that day, all of these contracts would have been exercised, which would require the almost immediate delivery of more than 430,000 ounces of physical gold. Quick delivery of that amount of gold would have exerted enormous pressure for much higher prices.

For a long time now, there are three standard times during the trading day when the price of gold is clobbered. The first is when the London markets open at 3 a.m Eastern Daylight Time. The second is when the U.S. COMEX market opens up about 8:30 a.m. The last is just after the London p.m. fix is reported.

The price of gold was attacked in this manner on Sept. 24, but buyers kept snapping up more gold, supporting the price over $1,000.

What it finally took to push gold below $1,000 was a major coordinated new tactic. The Federal Reserve announced that it was going to start withdrawing stimulus funds from the market. It also said it would scale back the short-term cash auctions in early 2010. At almost exactly the same time, the European Central Bank, the Bank of England, and the Swiss National Bank made virtually identical statements.

The timing of these announcements, and their matching of the message, just does not happen by chance. You can be sure that it was planned and coordinated.

Such announcements were predicated on the improvement of the world economy in the next few months. Merely talking about this prospect was enough to raise hopes in investors’ minds that somehow things will get better real soon. Gold fell, but not by that much. Still, the COMEX gold price did settle under $1,000 for the first of four consecutive trading days.

As a tactic, the announcements were brilliant. The strategy did not require that any of these central banks put up immediate liquidity into the markets. Actually, these central banks were not required to engage in any financial activity on Sept. 24. These announcements of plans do not necessarily mean that indicated future events will come to pass when the time comes. I’m virtually certain that none of them will, at least not within several months of when they supposedly will start.

Make no mistake; it took a huge international effort to bring the price of gold down on Sept. 24. Once the U.S. government saw that the recent announcement of the International Monetary Fund gold sale had flopped in suppressing the price of gold, it must have been obvious that the small interventions that worked in prior years are no longer effective. When the U.S. government has to take such extreme measures to hold down the gold price only a little bit – and it only works for a short time –that is a sign that the price of gold is close to a major increase.



Other developments:

The House Financial Services Committee began hearings on Sept. 25 on H.R. 1207, a bill calling for the Government Accountability Office to audit the Federal Reserve. Among the witnesses testifying that day was Scott G. Alvarez, the general counsel for the Federal Reserve. In response to a question from Rep. Alan Grayson, D-Fla., Alvarez precisely stated that he did not foresee that the Federal Reserve would object to an audit of the “physical presence” of gold alleged to be stored in government vaults. By carefully answering this question, Alvarez completely avoided the more important issue of whether all of the gold that is physically present in U.S. government vaults is actually owned by the U.S. government.

Since these hearings began, various Federal Reserve officials have repeated the threat that any audit of the Fed would result in higher interest rates, higher consumer prices and a lower value for the U.S. dollar.

If investors needed any more indications that the price of gold is getting ready for a major move, just look at what happened on Sept. 30. The price of gold closed on the COMEX at $1,008, the highest ever for the last day of a month, let alone the last day of a calendar quarter. This result will spur more technical traders into taking long gold positions.

Peter Schiff, the head of Euro Pacific Capital, does not accept the concept that the price of gold is being suppressed. Nonetheless, he recently released a statement where he predicts that the price of gold will hit $5,000 “in the next couple of years.”

Last Friday, the latest U.S. unemployment report again showed an increase. As with almost every monthly unemployment report in the past four years, the price of gold was beaten down at the time this news was released. The tactic has almost always worked. Not last Friday. The price of gold actually rose by the close of the COMEX, settling over $1,000.

In the July 29, 2009, issue of the monthly newsletter that I write, I stuck my neck out and predicted that the price of gold would reach $1,000 to stay and had a good chance of reaching $1,200 in the near future. I expected this to occur by the end of September.

Well, in September a Chinese official stated on the record that his country is going to adopt a partial gold standard, a governor of the Federal Reserve admitted that the Fed had engaged in gold swaps sometime between 1990 and the present, the International Monetary Fund confirmed that it will sell 403 tons of gold (and no longer be able to threaten to sell it once it is gone), and the legislation to audit the Federal Reserve overcame its main obstacle to eventual enactment. Despite extensive efforts to hold down the gold price, it closed September at $1,008. I consider my minimum price target to be achieved.

At this moment in early October, it is still possible that gold’s price may briefly dip below $1,000. However, I still think it far more likely that we will soon see at least $1,200 per ounce spot gold rather than $970 gold.



Patrick A. Heller owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” the company’s monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. His periodic radio interviews on WILS-1320 AM can be heard at http://www.amlansing.com and on the Korelin Economic Report at http://www.kereport.com.