Gold & silver: Frishberg looks behind the scenes

Former Wall Street insider and current host of BizRadio, Daniel Frishberg offers a fascinating glimpse behind the scenes of the gold market. 

In his The Moneyman.com Gold & Oil Report, he questions the role of not just overall market fundamentals, but the impact of short positions held by institutions. He also looks to a new favorite long position in silver.

"There are plenty of reasons to be bullish on the future of gold prices, including a weak US dollar. Further, India's Central Bank recently announced they wanted to buy IMF gold. 

"Russian and Chinese Central Bankers have also expressed an interest in purchasing the remaining IMF gold. Do major players know or suspect an announcement by the IMF that the remaining 204 tonnes of gold have been sold?

"Another possible reason for strong gold prices is the lifting of purchase restrictions in Vietnam. The country suffers from high inflation and citizens are purchasing gold rather than holding currency.

"They currently pay $25 or more above spot gold prices on the black market so eliminating restrictions will increase purchase volumes.

"Gold prices could also be higher because of the smoldering feud between Iran, the US and Israel. There is also the fear of impending inflation as the Federal Reserve continues to make more dollars available. 

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"Chairman Bernanke's plan is to eventually sell the Federal Reserve's treasure trove of low interest rate Treasuries and toxic mortgage bonds for dollars, and then retire the proceeds, i.e. destroy the money. 

"In this way, excess money can be withdrawn from the monetary system. At least this is how the plan will work in theory. Of concern is once the Federal Reserve limits their buying, interest rates will go up, choking off the recovery. So what happens next?

"The 1000 pound gorilla in the room is believed to be JP Morgan Chase. This bank and its clients are believed to be the largest holders of short positions in both gold and silver. 

"There are a couple of other banks holding large short positions, but the identities of all the big players are cloaked in secrecy. By US law, identities are protected so there is little transparency in either the gold and silver futures markets, at least not yet. 

"In the past, these banks have always been able to engineer a sell-off allowing them to profitably cover their short positions. These banks have the financial power to control bullion prices and routinely buy short positions to cap gold and silver advances. 

"They have been increasing their short positions since gold was in the mid $900 range. One estimate I saw is their net short position for gold is now $1billion underwater. If this seems like a large negative position, remember it is held by banks who reported billions in profits last quarter.

"At some point, these big players will be forced to cover their short positions. Their best case scenario is to engineer another forced long liquidation (panic selling) and cover most of their short positions at a profit. 

"This is also best for us as mining share prices will fall along with gold and silver prices. The decline will be temporary, allowing us to repurchase shares at bargain prices. 

"So far, the banks holding short positions have not been able to force a sell-off. In fact, this time could be different. Market forces may be just too strong with any dip in prices halted by willing buyers. If this is the case, we will buy back positions at higher prices.

"For now, we are 50% invested in gold with 50% in cash. If gold prices continue higher without a pull-back, purchasing shares at higher prices gives up some of the potential move. If gold prices temporarily decline, mining shares can be purchased at bargain prices increasing the potential for long term profits.

"Although it is frustrating watching gold prices go higher without being fully invested, I still see a bias to the downside short term. This is also what mining share prices are telling us as they are lagging behind bullion prices. 

"Am I being overly cautious? Maybe, but if gold prices were to climb to $1800 or $2000 an ounce, we could declare all of this worry about whether we should be fully invested at $1119 as being trivial.     

"With all of the above said, more exposure to precious metals appears warranted, especially in the silver market. A new position in a silver mining company is being recommended. Silvercorp Metals (NYSE: SVM) is a Canadian company with Chinese joint venture partners. 

"The mine is located in China so this is an exposure to foreign exchange as well as metal prices. The mining operations produce lead/zinc/silver. The great thing about this mining operation is silver is produced for free.

"Actually, after subtracting credits for lead/zinc sales, 1.2 million ounces of silver was produced last quarter for a negative $6 an ounce. The company just turned profitable so expect share prices to move higher with silver prices."