Gene Arensberg, in his Sunday Nov. 11 Got Gold Report for resouceinvestor.com, asked: “Why didn’t gold sell off?” If the Got Gold Report had been scheduled one day later, Arensberg wouldn’t have asked the question because gold and silver suffered big setbacks Monday, which was Veterans’ Day, with further drops Tuesday. Today, however, gold and silver rebounded in early trading.

Still, today’s gains are not nearly enough to wipe out the losses of Monday and Tuesday, which begs the question: Is the decline over, or is there still more to the downside before the metals renew their upside movement?

Arensberg was looking for gold (and silver in a sympathy move) to drop based on the record large commercials’ (LCs) short position in gold as of Tuesday Nov. 7. (Weekly positions are reported Thursdays as off Tuesdays.) With Monday’s and Tuesday’s drops, did the LCs reduce their short positions significantly?

Further, the LCs could have added to their short positions late last week as gold moved to 27-year highs. The commitment of traders report (COT) is as of Tuesday, but is released Thursdays, so the LCs could have added shorts late last week as the metals climbed, and they could have reduced their positions Monday and Tuesday.

Which puts us back to: Is the decline over, or is there still more to the downside before the metals renew their upside movement?

Frankly, I don’t know, and neither does anyone else. Still, analysts and traders (Note that’s traders, not investors.) who follow the market may be looking for a deeper decline because the LCs record position in gold. This week’s COT will shed more light on how the LCs see future action.

Arensberg’s comments on silver were interesting, particularly in that they are in line with my thoughts on silver vs. gold. Read Arensberg’s report for the details, but here are the comments that jumped out at me:

Is silver expensive here? Well, in a word, no. It may be due for a short term pullback technically, but with gold knocking on the door of its all time nominal highs silver has a mountain to climb value wise to achieve the same goal. In fact silver could triple from right here and still be under its all time 1980 nominal peak of $50. And in 1980 dollars were “worth� a lot more than now.

Adjusted for inflation silver’s 1980 $50 peak would equate to about $125 in today’s weakened U.S. currency, so silver would have to increase eight-fold just to match its peak purchasing power back then. Is that hyperbole? Well, perhaps a little, but even if silver’s 1980 mania-driven spike was a once-in-a-lifetime financial fluke, it traded for weeks over $35 back then, or the equivalent of $87.00 today. Silver could increase 400% and still not have the same purchasing power it garnered for weeks in 1980 in other words.

As for the technical short-term pullback that Arensberg suspects may be in the works, is it over? Frankly, I suspect the decline may not be over, but I am not advising any long-term investor not to buy at current levels. In the long-term, gold and silver remain favorably priced considering all the uncertainties the world faces. In the short-term, however, gold and silver can drive you crazy.

By the way, here are the gold market “drivers” that Arensberg sees:

. . . big honking write downs by the financial sector giants, a pipeline attack in Yemen, civil unrest and martial law in nuclear armed Pakistan, heavy weather in the North Sea and record high oil prices nearing $100, a mining strike in Peru, sub-prime woes expanding into prime time loans, major U.S. housing sector anxiety, lots of talk about slowing U.S. growth or even recession heaped on almost certainly higher inflation talk, a very sick and dangerously low greenback prompting increased fiat currency confidence erosion, significant and sustained short covering in both gold and silver … and the kicker this week: A high Chinese official commenting that China will be diversifying into other-than-U.S. dollars accelerating the already underway mass exodus of enormous global wealth out of the buck and mostly into the other global fiat paper promises.

The prospects of the Chinese diversifying out of dollars alone should drive people to precious metals.

Investors new to precious metals often ask which is better, gold or silver. Although not a difficult topic, discussing the matter can be long and convoluted. This blog post is not intended to cover all aspects of the topic but will lay out some considerations for investors when deciding which metal to go with.

What makes the decisions more confusing for new investors are assertions such as “Silver is an industrial metal, while gold is a monetary metal.” and “Because silver is an industrial metal, demand may fall in a recession and its price may not keep up with gold’s, on a percentage basis.”

First, both metals have been money throughout recorded history. The Old Testament tells of Abraham weighing four hundred talents of silver, “the current money,” for Ephron the merchant. And, everyone knows of the infamous thirty pieces received by Judas for betraying Jesus. More recently, silver coins circulated as money in our great republic until 1965, when, because of inflation, the silver content became worth more than the face value of the coins and they disappeared from circulation. (Actually, what happened was Gresham’s Law at work. Gresham’s Law shows that even the most unsophisticated know the difference between silver coins and base metal coins.)

Gold, too, is mentioned extensively in the Old Testament and was used thought history as money. Actually, it is accurate to say that gold and silver have been valued in all civilizations. In the United States, gold was used as money until 1933. Today, 109 countries, and the IMF, claim gold as reserves. Although a few governments (or their central banks) own silver, none claim its silver to be reserves. Consequently, because governments hold gold as reserves, but not silver, many analysts say that gold is a monetary metal and silver is not. In doing so, they ignore silver’s historic use as money.

As I view silver, its industrial use is a plus, a big plus. Daily, silver is used in applications that never result in reclamation. As for new gold being mined, little is used industrially and most is turned into jewelry, which is one form of owning gold, especially in India and the Middle East where bullion jewelry is the norm. Just because silver has many industrial uses does not mean it is no longer a monetary metal.

A final point: the so-called “smart money,” which usually is “big money,” tends to go with gold because it is much easier to handle and because the gold market is less volatile than the silver market. (With the development of ETFs, a lot of “smart money” is making some big silver investments because handling the silver is no longer an issue.) And, because the smart money usually recognizes a developing problem early, gold often gets the jump on silver in the early stages of some precious metals bull markets. A recent Doug Casey analysis noted that “gold is now up 15% since August 1, while silver has rallied only 6%.” That is too short a period to conclude that gold is a better investment than silver.

However, silver’s lagging gold since August 1 suggests to me that silver at this time is definitely the way to go because over the long-run silver turns in better percentage gains than does gold. With all the industrial demands for silver, there is reason to believe that it should do much better than gold this time. Additionally, there is the impact of the masses.

More people have used silver as money than have used gold. When the masses come to the gold/silver market, they will choose silver simply because they will get more physical metal for their dollars. In the aggregate, the masses have more money than the wealthy, because there are so many of them. That’s why they’re called the masses. The result will be a lot of money being poured into silver during any monetary crisis or period of sustained inflation.

According to IMF statistics, the United States is the world’s largest single holder of gold, with a reported 8,133.5 tons. Germany is a distant second with 3,417.5 tons, and the IMF controls 3,217.3 tons. Also according to the IMF, the “world” owns 30,120 tons. So, the United States owns 27% of the world’s official gold holdings.

Considering the great effort made to compile these statistics, we can fairly much rely on them. Except one thing: Who really owns our gold?

More often than not, articles and reports about US gold holdings leave the impression that the 8,133.5 tons (261,500,158.5 troy ounces) belong to the American people and held for them by the US Treasury. Most Americans believed than “our” gold is held at Ft. Knox, Kentucky, but there are no public reports or audits that verify where the 8,133.5 tons actually reside. I’ve seen reports that much of it is in the bowels of the Federal Reserve Bank in New York City. Still, if it turns out that one or more special vaults have built around the country for storage of the “nation’s gold,” it would not surprise me. While gold is disparaged by the Establishment, governments go to great lengths to protect “their gold.”

But, here is the real question: Who “owns” the 261.5 million ounces of gold: the American people via the US government, or the Federal Reserve? (Just in case any readers are new to this concept, the Federal Reserve is not a government agency. It is owned by its “member banks,” which means it is effectively owned by the persons who control the major banks in the United States, many of which are owned for foreigners.

Do a web search for “Who owns the Federal Reserve?” and you will find a plethora of material. At the top of the search will probably be an article by the Fed, which is more confusing than enlightening:

The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

The “Reserve Banks are not operated for profit” so says the Fed site, but the banks that “own” the Fed certainly are operated for profit, and the Fed is operated for the benefit of the “banking industry,” which means the huge banks that own the Fed. One of the best books—and a short one at that—is Murray Rothbard’s The Case Against the Fed.

Another point: when US banks that “own” the Fed are merged into foreign banks, foreigners become “owners” of the Fed, our central bank. Two such cases immediately come to mind: the absorption of Republic National Bank by HSBC, one of the world’s largest banks. The other was the acquisition of Fleet Bank by Swiss Bank Corporation.

Do the other large US banks care that these two banking behemoths have footholds in the US? Not really. They’re all members of the same exclusive club: banks too big to fail, which means government bailout if they get in trouble. But, I’ve digressed.

Who owns “our” gold?

The IMF reports it is owned by the Federal Reserve System, and so do the writers at mineweb.com, which has just posted an article about the last gold sales under the Central Bank Gold Agreement. In that article: The Bundesbank . . . is the second-largest hoarder of gold behind the U.S. Federal Reserve.

Now, a single statement by a web-based news publication is not the final word; however, what is to be noted is that when such assertions are made, there are no refutations by the Treasury, the Fed, or any other US monetary authority. The Fed owns “our gold.” You better buy your own gold.

The Central Bank Gold Agreement calendar ended September 26, and early estimates have gold sales under the agreement falling short of the annual 500-ton limit. However, it appears that there was a “rush for the door” in the final weeks, which I noted in the August 1 post Rumbling of more central bank gold sales was a possibility.

The rush to sell may have contributed to gold’s sharp downside moves in July and August. Since the middle of August, however, the price of gold has turned in a stellar performance. If any of the central bank sales were made since mid-August, then gold’s price action was even more impressive.

Matthew Turner, analyst for Virtual Metals, estimates central bank sales for 2007 at 475 tons; however, the World Gold Council, an authoritative source when it comes to central bank gold sales and purchases, estimated in mid-September that sales under CBGA 2007 would be 450 tons. Definitive numbers will not be available for several weeks, if not months.

Central bank sales for 2006 also fell short of the limit, and Turner estimates that in 2008 sales will again come in under the 500-ton limit, unless “. . . either Germany or Italy sells . . . or France accelerates its sales. . .” Interestingly, during the last week of the agreement, one central bank (as of yet undisclosed) reported buying gold coins, not bullion, the standard form of gold for central bank holdings.

Also interesting is that central bank gold sales under the CBGA are now falling short of the limit despite the price of gold surging to 27-year highs. Invariably, when central banks announce their reasons for selling, they mention buying “interest-bearing instruments” or “balancing their holdings.” Because the price of gold has risen to a 27-year high, the values the central banks’ gold holdings have grown disproportionate to the banks’ paper assets, so the banks sell gold and buy paper to balance their portfolios. Some sell to reduce debt, as Italy is talking about doing.

In the investment world, one thing you want to do is hold your winners and sell your losers. That’s an axiom as old as the ages. For the European central banks, however, it seems to be the opposite.

A final note: there is talk of the IMF selling up to 400 tons to pay for operations. If the IMF sells, it will undoubtedly roil the precious metals markets. However, this is a real precious metals bull market that should sop up any IMF sales if made in an announced and an orderly manner, such as sales are made under the CBGA.

After suffering a $21 decline August 16, gold went on a tear and with Friday’s $10 gain traded in the $744 range. In about six weeks, gold tacked on nearly $100 for a 15% increase. Silver, which suffered a $1.06 drop on 8/16, posted an 18% gain of $2.20 since 8/16 but did not take out its May 2006 high as did gold. Many analysts see silver’s failure to take out it May 2006 high as negative for silver, but I’m not concerned, being confident that before this bull market is over silver will outpace gold. Fact is silver took a bigger hit than gold August 16, which also does not concern me. Silver has always been more volatile than gold.

Meanwhile, Gene Arensberg, in his excellent Got Gold Report, a biweekly feature of resourceinvestor.com, has an insightful look into the precious metals markets. He’s flying short term caution flags for gold and silver because of the big increase in the large commercial traders’ (LCs) short positions but remains bullish over the long term. He notes:

In the Tuesday 9/25 commitments of traders report (COT) the COMEX large commercials (LCs) collective combined net short positions jumped a big 32,748 contracts or 19% from 175,264 to a staggering 208,012 contracts net short Tuesday to Tuesday while gold metal ground upward $7.75 or 1.1% from $723.85 to $731.60 on the cash market.

The large commercials (LCs) mostly are the bullion banks that are notorious for taking short positions in gold and silver. Some analysts see the bullion banks as having great insight into the precious metals markets; others say the bullion banks manipulate precious metals prices via their huge positions.

Arensberg also noted that the last time the LCs were this confident of lower gold prices that were right in the short-term but wrong in the long-term.

Although the LCs can be quite nimble, they were not able to get out of most of their positions and suffered big losses as gold climbed to $730. So, it is not a guarantee that gold is going lower just because the LCs have increased their short positions. However, the LCs must be given their due; they are often right (probably because of their might!).

In a recent article (also linked to in the 9/27 post), Ted Butler also said that the big LCs’ short positions in gold have to be recognized as short-term bearish. Still, he noted that the LCs are seemingly no longer willing to take huge short positions in silver. As Arensberg notes, the LCs’ short positions in gold are huge, second largest ever. However, the LCs’ short positions in silver are nowhere near record levels.

What’s this mean? Probably a 70% chance of a precious metals price drop, which enables the LCs to cover some of their short positions. But, here’s the rub: gold and silver could go still higher before the correction. Perhaps the LCs’ short positions will climb to a new high before the correction.

It’s not easy knowing when to buy gold and silver, but normally a good time is on price drops. So, if the LCs are right, be prepared to buy but don’t count out higher prices before the correction that everyone seems to think is inevitable because of the LCs’ positions.