Gold investors, whether in the physical gold or in the gold mining companies have been frustrated by the stagnant and declining price of GOLD. What’s going on?!
Central Banks, especially China, Russia, Iran, Turkey and India, are buying physical gold like mad. DEMAND IS VERY HIGH. Mining companies are finding it harder to pull gold out of the ground, harder to find new gold deposits, and very costly to both find it and go deeper. It is becoming scarcer. Supply is hard to maintain, getting harder to supply, and, based on recent numbers, SUPPLY IS DECREASING.
Basic economics dictates that if supply is tightening, which it is; if demand is increasing, which it is; then, price ought to be soaring, which it isn’t. So why isn’t Gold soaring?
It is alleged by some who study the prices of gold in the markets, and who try to balance the price trends of gold against the above economic factors that ought to be driving the price of gold upwards, that gold prices are stable or falling largely because of NAKED SHORTS.
To explain “Naked” shorting we must first explain the process of “shorting” a stock. “Shorting” can seem to be a rather complicated process. It is complicated and it is RISKY. Here is a stripped-down overview of “shorting”, a layperson’s explanation–one layperson to another, me to you:
- borrow shares at today’s price,
- sell them when price falls,
- buy shares at the cheaper price,
- return shares back to the person or company that loaned the shares in the first place.
It is important to remember that “shorting” stocks is a high risk activity since stock prices may not fall and may rise instead. One other element that is prescribed by law is that the shares must ACTUALLY EXIST, meaning that someone must actually own the physical share certificates. You can not short against thin air…not unless you are a big bank trading gold and have permission by the Central Bank and the country’s government’s watchdogs.
“NAKED SHORTS” works just like “shorting”. However, there is one very important difference…the “naked” signifies creating a contract to sell stock or commodity out of thin air with no physical component to back it up. You and I can’t create naked shorts. We’d go to jail. However, the select few big banks which are mandated by the Government and the country’s Central Bank can do so since they are legally permitted. To protect the value of the reserve currency, for example, to protect the value of the USA dollar, the USA Federal Reserve and SEC issues authorization for its select big banks to create all the paper contracts deemed necessary in gold or other precious metals, out of thin air, to influence investors and trader into thinking the price of precious metals in the future will be stable or will fall.
Since the big banks around world want to keep their money reserves well protected, if they see the value of precious metals going down in the future, which they conclude if they see large volumes of short contracts against the precious metals, then those big banks will pour their money, their reserves into the USA Dollar instead of precious metals.
As long as those select few big banks are allowed to create naked shorts, the price of gold will remain stable or will be pushed down at their every whim.
Of course, there is MUCH MORE TO THE ABOVE trading techniques: complexities of SEC trading laws that clearly define under what circumstances such variations from law are allowed, etc.; huge risks when prices fail to go in the direction anticipated by the originator or purchaser of a short contract; and much more.
[NOTE: I am not a financial expert. If you want to invest or trade in stocks or commodities, or make any other financial decision, please seek qualified, professional advice. It may be in your best interests to go speak to a CERTIFIED FINANCIAL PLANNER to discuss your saving and investing needs.]