The recent volatility in the precious metals markets has the gold bulls and bears jostling to make their case for the price of gold going forward.

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05/04/11 Baltimore, Maryland – Gold has shown more resilience this week. At last check, it’s still higher than it’s been anytime up until… hmm, let’s check the chart… two weeks ago.

Still, the known big buyers and sellers of the yellow metal are making for an interesting trading environment currently.

The gold price is being pulled down, for example, by news that George Soros is cleaning out some of his considerable position.

The trade hasn’t shown up in a 13-F filing — because that will be issued later this month — but The Wall Street Journal claims “the Soros fund has sold much of its gold and silver investments over the past month or so,” according to “someone close to the firm.”

As authoritative as that sounds, the story the WSJ tells is that Soros loaded up on gold to guard against a collapse in consumer demand after the crisis. Gold, the theory goes, would buy more if prices were falling. But now that the Fed has loosened the monetary spigots, and will keep dribbling even after QE2 wraps up in June, Soros does not fear “deflation” so much.

Likewise, if he’s selling his gold, he doesn’t think “inflation” is much of a threat either.

Alan Fournier of Pennant Capital is unloading some of his gold too, most likely to take profits as the market gets jittery near this false peak.

Meanwhile, John Paulson is happy to take the other side of the trade… which is helping keep a floor under gold.

The man who made his fortune shorting subprime told investors yesterday that lax monetary policy from the Fed, and the Bank of England, has him convinced gold will head to $4,000 an ounce over the next three-five years.

Mexico’s central bank added 93.3 metric tons of gold to its reserves in February and March.

We haven’t seen a number like this since November 2009, when India happily snapped up 200 metric tons of the International Monetary Fund’s gold stash. Most of the Mexican purchase — 78.5 metric tons — came in March, marking the single largest one-month accumulation by a central bank in 10 years, according to the World Gold Council.

Combined with steady purchases by China and Russia since 2003, the news “seems to confirm there’s an appetite now among emerging economies with large forex reserves to add to their gold reserves,” says Matthew Turner, precious metals strategist at Mitsubishi.

Central banks worldwide became net buyers of gold last year for the first time since 1988.

Using the government’s current CPI calculation, gold would be priced at $2,442 today. And using the government’s 1980 CPI methodology, we’d be looking at $8,331 — a tad more ambitious than John Paulson’s $4,000.

Addison Wiggin
for The Daily Reckoning

Addison Wiggin is the editorial director of The Daily Reckoning, and executive publisher of Agora Financial, an independent financial research firm based in Baltimore, Maryland. His second editions of international best-sellers Financial Reckoning Day Fallout and The New Empire of Debt, which he co-authored with Bill Bonner, were updated in 2009. His third book, The Demise of the Dollar… and Why it’s Even Better for Your Investments was updated in 2008, the same year he wrote I.O.U.S.A.

Party politics in America are pushing up the gold price, and that’s playing right into their hands….

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05/04/11 Baltimore, Maryland – Monday was a no-action day on Wall Street. Tuesday was dead too. Except that gold dropped $16.

The killing of Osama bin Laden was supposed to raise prices. Especially the price of the dollar. The buck has been going down for 3 years. It’s now within a few cents of its all time low, registered back in the ’70s.

We were prepared to advocate more killing, maybe even mass murder, if it would lower the unemployment rate…but the ‘killing lift’ was short lived. It lasted only a few hours. Then, things returned to normal.

But normal is very strange. No matter what happens, investors take it as good news.

Investors’ sentiment is overwhelmingly bullish. Stock prices are unquestionably high. Dividend yields are low.

It is almost enough to make you think we weren’t really in a Great Correction after all. But as near as we can tell, the Great Correction continues.

So…

If we’re right, most investors are wrong.

If we’re right, stock prices will come down – hard.

If we’re right, real bond yields will go up sharply.

If we’re right, commodities are over-priced.

If we’re right, gold should correct.

But wait. There’s more.

If we’re right…the Great Correction is only part of the story. The other part is the feds’ reaction to it.

That’s why all of these Great Correction phenomena could soon give way to another phenomenon – inflation.

If we’re right, the feds are just waiting to see what happens next. They know that there’s something very wrong with their ‘recovery.’ But they don’t know what. They’re just hoping that it picks up enough steam to continue on its own, without the need for more towing.

Because they’re watching prices rise too. Bernanke says this inflation is ‘temporary.’ He’s probably right…to a point. Inflation is rising because of the feds. When the feds stop force-feeding liquidity into the system, prices should fall again.

Asked what would go up after the Fed announced its QE2 program, a shrewd analyst replied – ‘everything.’ Now, everything is up – except real estate. And now the Fed says its program of QE2 will come to an end in June.

So we ask. What will come down when QE2 ends? The answer comes as quickly as a pizza: everything.

If we’re right, the feds have not really laid the groundwork for a genuine economic recovery. Instead, they’ve pumped up government spending…and re-inflated the financial sector. This has put more money in voters’ pockets. Usually, about 12% of personal incomes come from the government’s programs – such as Social Security, unemployment comp, food-stamps and the like. Today, the figure is 18%.

In 1949, 70% of national income came from wages. Now, the figure is barely 50%…with the other 50% from finance and government giveaways. The trouble with income from speculation and government handouts is that it reflects no real increase in wealth. It is ‘funny money.’ For every speculative gain, there is a speculative loss. And for every dollar given in government payments, there is a dollar taken away somewhere else.

QE2 was the funniest kind of money. It was created – by a computer – in order to ‘pay’ Wall Street for US bonds. If we’re right, it was this funny money – combined with other comic acts, including zero interest lending and trillion-dollar deficits – that caused ‘everything’ to go up. And if we’re right, everything will go down when it is taken away.

Bill Bonner
for The Daily Reckoning

Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the new book from Bill Bonner, is now available for purchase. It is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010. Whether your new to these Daily Reckonings, or one of Bill’s “long suffering” readers, this is one you surely won’t want to miss. Click here to get your copy today.

“It’s too early to tell whether the speculative silver edifice has toppled over, but there’s at least a fair chance that it has. From what I hear, the silver smelters are busy melting down silver trays, silver tea sets, silver knives and forks, anything the public can dig up in the way of silver.

The public seldom gets it right, but this may be one of those rare instances when the public’s reaction to new highs and a towering parabolic structure is correct. “ Richard Russell Dow Theory Letters

Soros, Other Hedge Fund Managers, Dumping Precious Metals

It’s been a horrid week for silver as three margin requirement increases in just over a week, along with the bursting of the speculative fervor seen last week, looks to have pushed silver over the edge (for now). The WSJ is reporting this morning, that some prominent hedge fund managers – led by George Soros – have been dumping the metal. Recall Soros said “gold is the ultimate bubble” in January 2010 … only to have it be revealed in his next fund disclosure that gold was amongst his largest positions. [Feb 17, 2010: George Soros Calls Gold a Bubble, then Stocks Up On It] Not a coincidence as money managers now have to expect Fed induced bubbles, and play them – with everyone assuming they can get out at the door, once the music stops. It appears the parabolic move that silver enjoyed the past few weeks – after a steady climb from August 2010 when Bubble Bernanke declared he is adding inflating asset values as the Fed’s third mandate – Soros (and a few others) decided the music was stopping. At least for now.

For silver and gold bulls the news is still positive. Infamous John Paulson says gold is headed to $4000 …

Via WSJ

• Silver prices plunged, suffering their worst one-day drop in dollar terms in three decades, as investors fretted that rising trading costs could cripple a market exhibiting signs of froth. Silver’s fall of $3.50, or 7.6%, and a 1% drop in gold prices Tuesday came as some major investors have been selling. George Soros’s big hedge fund, a firm operated by high-profile investor John Burbank and some other leading firms have been selling gold and silver, according to people close to the matter, after furiously accumulating precious metals for much of the past two years.

….read much more HERE