On March 23, 2010, London gold trader Andrew Maguire lent new credence to GATA's allegations by producing a series of e-mail exchanges between himself and the Commodity Futures Trading Commission (CFTC). In an e-mail dated February 3, 2010, he correctly predicted specific price manipulations that would take place two days later, on February 5, 2010. Shortly thereafter, GATA was invited to testify at a CFTC hearing on position limits.[9] At the March 25, 2010 hearing, GATA was able to present its allegations for the first time.
During the hearing, a former Goldman Sachs trader, Jeffrey Christian, revealed that LBMA over-the-counter market trades 100 times its holdings of "physical gold",[10] meaning that for every ounce of gold it sells, only one buyer could actually redeem the certificate in gold;[11] the remaining 99 certificate holders would have to accept a cash settlement.[10] Christian's testimony confirmed one of GATA's most serious allegations, that fractional reserve practices exist within the world's chief physical gold market.[12][13] The existence of massive naked shorts in the estimated $5.4 trillion gold market has been called the world's largest "fraud", a Ponzi scheme that dwarfs the Bernie Madoff scandal.[1][10][11] GATA and some gold investors fear that a sudden surge in demand for physical gold, particularly by holders of large quantities, could trigger "the biggest bank run in history"[14] and cause the U.S. dollar and other currencies to collapse.[12]
From: http://en.wikipedia.org/wiki/Gold_Anti-Trust_Action_Committee
Now what implication does this have on you and me?
Standard Chartered: "Three Factors Will Drive Gold To $5,000" (currently around $1650)
We are bullish on gold. Most market commentary on gold has centred on the direction of US dollar movements or inflation/deflation issues. We go beyond this to examine future mine supply, which we think is just as important a driver. Our comprehensive study of 375 gold projects supply suggests a very limited production growth profile for the next five years. A ten-year bull market in gold has done little to drive gold production. The gold miners are running to stand still. A lack of funding from equity markets and a shortage of large gold mines makes it difficult for the industry to compensate for the depletion caused by aging mines and falling grades. In our base case, our 375-mine supply model shows net production growth of 3.6% pa. over the next five years.
Our IRR analysis shows that for the major gold projects under construction, for which the acquisition cost of gold resources has already been spent, the gold price would need to be US$1,400/oz in order to generate a 20% IRR, which is usually the minimum return requirement. For greenfield projects going forward, the gold price would need to be nearly US$2,000/oz to produce an IRR of 20%. We believe this daunting hurdle will likely further delay gold production.
The limited supply comes at a time when central banks have completely changed their tune on selling down their gold stocks and now appear likely to accelerate their net buying programmes. China is way behind the curve. Currently, only 1.8% of China's foreign exchange reserves is in gold; if the country were to bring this proportion in line with the global average of 11%, it would have to buy 6,000 more tonnes of gold, equivalent to more than 2 years of gold production.
We believe that these factors – limited gold production, buying by central banks and increasing demand from India and China – can potentially drive the gold price to US$5,000/oz, as highlighted in our commodity team's earlier report, Gold – Super-cycle to extend above US$2,100/oz (17 April 2011).
We believe the best ways to invest in the gold cycle are buying physical gold (a safe asset) or investing in junior gold miners (highest leverage to the gold price) that are 1-2 years away from production. We are cautious about the gold majors. Project plans of the big five gold producers by market cap suggest an average production CAGR of only 4% in the next five years. They need to depend on expensive acquisitions in order to grow further. As a form of affirmation, the share price index we constructed for the gold majors underperformed the gold price by 147ppt over 1995-2011.
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