Bert Dohlmen On Gold And Precious Metals Manipulation

Tyler Durden's picture

Doug Kass appeared on CNBC today and attempted to present a bearish case on gold (along with his 3rd, or is that 33rd, case for a market top...) based on a verbatim recitation of half of Howard Marks' letter that we posted as a must read over the weekend. Naturally, had he recited the other half, he would have had to defend a diametrically opposing view, as that is the difference between great minds, who present both sides to the argument, and, well, everyone else. Nonetheless, we thank the bottom and top-ticker for offsetting some of the fervor his far more amusing boss at theStreet has imparted on gold, and which we find extremely worrying, as any time Cramer stands behind an asset, it is time to sell, no matter how much we like it. That said, and since we enjoy providing Doug and others with reading material for their "original" content for the next time they appear on CNBC, here is an excerpt from Bert Dohlmen's latest letter which explains not only why gold is an "investment for the ages" but also ties it in with the much discussed here topic of commodity manipulation: a far more important concept that we are surprised receives far less attention on such momentum chasing shows as Fast Money.

From Bert Dohmen's Welllington Letter, December 18 edition:

GOLD: THE INVESTMENT OF THE AGES

All except new subscribers know: we are very bullish on gold for the next 5-10 years. We believe it is the one investment that will prevail during the unprecedented turmoil ahead. The governments around the world have only one response to the problems of failing banks, excessive governmental debt, potential sovereign debt defaults, and soaring unemployment: print more money! It’s called “monetizing the debt.”

And people around the world have learned that to protect yourself against the governmentally induced destruction of the value of paper currency you buy gold and silver.

We saw this during the turmoil in Ireland in recent weeks. As the dollar soared, gold and silver rose as well, which is contrary to past behavior when a strong dollar was bearish for the precious metals. That indicates that the precious metals are now a global hedge against depreciation of all currencies. As my friend Clyde H. always says, “All currencies are sinking, just at different rates.”

The U.S. is on the same path as Greece, Ireland, Spain and Portugal. The extension of the U.S. debt ceiling this week turned out to be a virtual “Christmas tree” hung with all types of goodies, i.e. “pork,” for everyone who has paid into the coffers of the politicians. It’s $1.1 trillion of additional expenditures. Fortunately, it was defeated. This was on top of the tax compromise package the prior day that contained lots of tax benefits.

Moody's warned that it could move a step closer to cutting the U.S. AAA rating if President Obama's tax and unemployment benefit package becomes law.

China and other holders of U.S. debt are cognizant of the U.S. debt problem.. In China, they plan ahead, 10-30 years. They see the trends and prepare. China is now the largest gold producer in the world. Furthermore, China is the largest gold importer in the world.
China’s state-run Xinhua news agency writes that China imported 209.7 metric tons of gold in the first 10 months of this year, a 500% increase of 2009. China encourages its people and financial institutions to diversify into gold. Remember the Golden Rule: “He who has the gold, rules.”

Once the large institutions worldwide start putting some gold assets into their portfolios, we will see a parabolic upmove in its price. And you want to be positioned for that. There are many ways, and many different ETFs. You must do some homework. We prefer ETFs that do not store physical gold in the U.S. We also like ETFs that invest in the mining stocks. Diversification among different ones is wise. And the day will come when you don’t want the gold ETFs traded on the U.S. exchanges.

COMMODITIES: MANIPULATION?

Copper is looked at closely by investors, even if they never speculate in the metal or in other commodities. It’s almost like a bellwether for commodities and “risk-taking.”

There are several copper ETFs being formed now. That will create initial demand as they must buy copper to satisfy the initial investors. Could that be the top in copper prices and, therefore, in commodities? Many traders in these metals say that copper is highly manipulated, that there really is no shortage, and prices are kept artificially high. The same is said of oil. If that is correct, and we have a feeling that it is, then we have to look at the possibility of this game ending sometime in the future.

What will end it? A realization that the China real estate bubble is starting to deflate.

There are rumors that one trading outfit owns more than half of all the copper stored for the LME (London Metals Exchange).

We have also heard rumors that silver is being manipulated and that someone is trying to corner the silver market. Remember, the Hunt brothers tried that in 1980. They went broke as a result when the exchanges changed the rules.

Bart Chilton, a CFTC commissioner, said in October that he believed there had been “fraudulent efforts” to “deviously control” the silver price. No names were mentioned. Recently, he said that “earlier this year, one trader held more than 40 per cent of the silver market.”

The Financial Times reports that the CFTC’s Bank Participation Report indicates that “one or more US banks” held a gross short silver futures position equal to 19.1% of the total number of outstanding contracts in early December (2009) and 32.2% in January (2010). But that report is only for the U.S. exchanges.

It is known that JP Morgan had a very large short position on New York’s Comex exchange, a division of Nymex. Supposedly, these were hedges for the bank’s long positions in physical silver and London’s over-the-counter market.

On December 16, 2010, the CFTC issued proposed position limits for commodity contracts. This has been expected for a long time; nevertheless, it caused a plunge in a number of hot commodities, including gold. The fear is that this will cause the big futures operations to dump large positions. In realty, we believe that there will be many ways to circumvent the regulations by those who want to manipulate the markets.

Also on the regulatory front is a report regarding what effect the new Basel II banking regulations would have had if they had been implemented immediately, instead of with the delay of 5 years and more. The report said that financial institutions would have to raise $797 billion of capital. Furthermore, lenders would have to raise a huge 2.89 TRILLION as protection against a run on deposits.

This gives you an idea of the massive amount of capital banks will have to raise over the next years. We will need a spirited economic recovery to make that possible. This problem will not go away.

Those interested in the full Wellington Letter, can find the subscription terms here.