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Is gold going to spike to $3,000 on a short squeeze as China uses gold to buy oil from Iran?

Posted on 26 April 2012 with 3 comments from readers

Legendary gold trade Jim Sinclair is seriously suggesting that gold could spike to $3,000 in a short squeeze because of the Chinese decision to pay for oil in gold bullion (listen here). Basically there will be a sudden demand for physical gold that cannot be met and short sellers will be forced to cover and buy gold at higher prices.

He told King World News: ‘You have seen in the last month, a phenomena. If you have eyes in your head, you have to know when the gold banks enter into the gold market, offering more for sale than would be mined in the next five years, they are not in there to sell anything. They are in there to manipulate the price.

Central banks buy gold

‘Well, we’ve seen some V-bottoms during daily operations, where they (manipulators) have forced gold (down) and it just snapped right back. There is no question, it is a matter of record, that multiple central banks around the world have been large buyers of a significant amount of gold in the last two months.

‘As the paper speculators attempt to manipulate the price lower, they have run into the physical buyer who won’t let the physical market follow the paper market. Who is giving gold a chance here? Who’s talking positively about gold, except a very few?’

Mr Sinclair is of course among the very few who understand what is going on here and do give gold a chance. And even his words of wisdom can be somewhat opaque to those who do not follow the gold market on a regular basis.

Big ‘if’

This latest pronouncement is still based on a big ‘if’. For we cannot be sure that China will actually use bullion to buy oil from Iran. The EU may well not impose its oil buying embargo on Iran this summer if it gets material progress in talks on Iran’s nuclear program, and that looked a bit more likely last week.

Then again a switch out of the dollar to buy oil and into a commodity that is a currency is a fairly natural step in the current environment of global money printing. Basically the holders of two commodities are organizing a barter trade to avoid currency risk.

This is already happening at the national level among the BRICS emerging economies who want to trade between themselves in their own currencies rather than the dollar whose current high is probably coming just before a major fall once the US presidential election is done.

However, ArabianMoney is not convinced either that the Iranian oil embargo will go ahead or that spiking the gold price at this point is in China’s best interests as the world’s biggest holder of dollar reserves. Still logic does not always apply in such matters and Mr Sinclair has his hands on experience of the 1970s to call upon.

Posted on 26 April 2012 Categories: Gold & Silver, Oil & Gas

3 Comments posted by readers:

Comment by Roger - 27 April 2012

I think you misunderstood what Mr. Sinclair was trying to explain. He was not saying that gold was going to spike because Iran accepts gold from China as payment, instead his assertion is that a transaction(s) of size between legitimate entities confirms golds status the real currency. He further contends that gold could become a medium of exchange that lies outside the US’s SWIFT payment system the the current administration is attempting to use as a financial weapon against Iran. His point is that once transactions in gold occur outside the SWIFT system it puts a floor of demand under gold, because the US can not block or threaten that medium of exchange without international incident. Then once it is accepted that gold is money that we all know it really is it casts the harsh light of reality on paper currencies exposing all their warts, as in they are not backed by anything and the entities issuing them are fiscally broke. In other words John Q will come to recognize that those pieces of paper with pretty pictures on them are not worth what they once were. Once that happens demand for gold willl escalate and the games played at the Comex\LBM to contain the price of the yellow metal by selling forward 5 years of mine supply in 1 day will cease. This manipulative behavior will stop because the supply of gold with which to cover will not be available instead they will be spoken for. If the shorts can not cover then you will initially get a short squeeze like Sinclair predicts which might go to $3,000 or more there is no way to know how high it could go if these massive positions can not cover because they can not obtain the metal. It will take true price discovery to set the price and I doubt it will be at $1650 like today. Add to this the supposition that the paper market would be broken and price would be held a t a higher level because new gold entering in to the market could not be made out of paper contract but instead limited to mine supply in the neighborhood of 2,500 tons per year. There are those that say this can not or will not happen but just think back over the past 12 years and how many things that people said could never happen have come to pass.

Comment by Roger - 27 April 2012

I also forgot that you are correct China would not be thrilled with spiking gold price but the US may be unwittingly causing it anyway; and China will have no control over the situation. Additionally, a rising gold price would be all the more incentive for China to acquire miners, and physical gold as fast as possible if Dollar hegemony is under siege because they will want a backed currency. Moreover, this is not to the US ad vantage either as we need China to buy US treasuries not gold but in this scenario it could force Uncle Ben to step up to the plate and print in a big way further exacerbating the death spiral that is the Dollar long term

Comment by obewon - 27 April 2012

Excellent stuff here, Peter!

@ Roger:
Your commentaries were also quite noteworthy, esp. your remarks about the rigged SWIFT system that is controlled (and manipulated!) by the US, the manipulation games being played on a daily basis by the COMEX/LBM gang to contain the price, the folly of paper gold, etc.

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