|
Hugo Chavez wants to remove 99 tons of
Venezuelan gold from London bank vaults. That could touch off a “short
squeeze” of epic proportions.
Daniel Drew, born July 29, 1797, was a
powerful financier of the gilded age.
As a speculator, one of Drew's favorite sayings related to short selling: "He
who sells what isn't his'n / Must buy it back or go
to prison."
Cornelius Vanderbilt, the railroad
baron, taunted Daniel Drew with this very saying as he squeezed Drew
mercilessly. Drew was short a railroad stock, the New York and Harlem
Railroad, when Vanderbilt and his associates bought up all available shares
to drive the price up.
The share price more than tripled in
just five months, as shorts were forced to buy back at any price. It cost
Daniel Drew $500,000 -- a considerable sum in 1864! (Drew later lost millions
more, but that's another story.)
In recent days, short sellers in the gold market may have felt a bit like
Daniel Drew. Even as prices have gotten wilder and woolier
-- gold threatening to go straight up -- a potential new Vanderbilt is
emerging from the shadows.
His name? Hugo Chavez.
According to recent statistics, the
Venezuelan central bank is the world's 15th largest holder of gold. As a
country, Venezuela owns just under 365.8 tonnes
(metric tons) of the yellow metal.
Of that sum roughly 58% of the total,
or 211 tonnes of gold worth more than $12 billion, is held in London bank
vaults. Chavez wants to bring most of it home.
As Bloomberg reported last week:
Venezuelan President Hugo Chavez said
he will move forward with a proposal to repatriate as much as $11 billion of
gold reserves held in the U.S. and Europe as part of a plan to shift assets
away from American institutions.
Venezuela will transfer 99 tons of
gold from the Bank of England to the South American country's central bank,
Chavez said today on state television. Venezuela also has gold at JPMorgan
Chase & Co., Barclays Plc, Standard Chartered Plc and the Bank of Nova Scotia, he said.
Why is Chavez doing this?
Part of the motive may simply be
sticking it to the "yanquis" -- twisting
the knife just because he can. A more realistic motive, though, could be
avoiding asset seizure from international lawsuits.
And why would Venezuela be sued in international court? Because of Chavez' other
big announcement last week -- a decision to nationalize Venezuela's gold
mines. "The area is run by the mafia," he said. "We're going
to nationalize gold. We can't keep allowing them to take it away."
All of this brings about "short
squeeze" potential because of the shady goings-on between central
bankers and international banks.
For many years the banks have been
accused of artificially suppressing the gold market with "phantom"
short sales, achieved by lending out bullion they don't actually have. This
is easy enough to do if no one pays attention: If a banker has 5 tons of gold
in his vault, he might "lend" it to short seller A in a paper transaction,
leaving the actual gold in the vault.
Nothing would then prevent the banker
from "lending" the same 5 tons to someone else, with nobody the
wiser, in a sort of fractional reserve system for short sellers of gold.
The scheme works up until the day too
many short sellers are forced to cover at once, with too many actual owners
of gold demanding the physical metal. When that happens, it's game over, as
many exposed shorts find it virtually impossible to cover.
Venezuela's stated intent to pull 99
tonnes from London's gold vaults could, at least theoretically, set off such
a reaction.
It could also lead to similar requests
from other central banks, hungry to repatriate their gold reserves held abroad, to avoid the
risk of being told "sorry, we don't have your physical just now..."
To actually move all that gold to
Venezuela would be quite a feat. It could take as many as 40 separate trips,
the Financial Times reports, because it would be impossible to insure
a single aircraft.
There is also the question of where
Venezuela's central bank will put it all. Says Chavez: "If there isn't
enough room to store the gold in the central bank vaults, I can lend you the
basement of the Miraflores presidential
palace."
It may be a bluff. Chavez could still
modify or cancel his plans at the last moment. But even so, a sort of
Pandora's box has been opened here. If Chavez makes good on his intentions,
there is no telling what the major league short sellers of gold will do.
There are already signs of blood in the water, as large global macro hedge
funds scramble to get their hands on physical receipts.
Bottom
line: Those waiting to buy gold at significantly lower prices might see their
patience rewarded... but they might not. In a true "short squeeze"
tied to severe supply/demand imbalance, a parabolic move could last for weeks
(or even months). Anyone short gold without a tightly defined risk point
risks the Daniel Drew experience.
Justice
Litle
Taipan
Publishing Group
Article
brought to you by Taipan Publishing Group. Additional valuable content can be
syndicated via their News RSS feed. www.taipanpublishinggroup.com. Don't forget to
follow Justice Little on Facebook and Twitter for the latest in financial
market news, investment commentary and exclusive special promotions. Article
originally published here
|
