As momentum in the gold market turns bullish, many people wonder what has suddenly happened to change things? The simple answer is nothing. The price of gold is simply being set by political forces. Let me explain to you how I know this.

Once you crunched the numbers, it was easy to see that the low gold prices were not real and could not last. In my article, “Did COMEX Just Receive A Physical Gold Bailout From The Feds?”, for example, which was published in June 2015, I did crunch the numbers. At that time, gold was selling as low as about $1,175 per troy ounce. I carefully calculated the physical cost of the politics of gold.

Comparing new mining supplies + scrap against the then-existing actual physical demand, it was clear that a not-so-mysterious gold supplier "of last resort" was injecting physical gold into the trading system. In fact, in order to prevent widespread failures in delivery, that entity was going to have to inject at least 1,345 tons in 2015, to balance supply with demand. But, demand in both India and China went up a lot more than we expected, and supply came in almost exactly as projected.

The not-so-mysterious "gold supplier of last resort" ended up having to inject somewhere in the neighborhood of over 1,500 tons. If it hadn’t done so, we would have seen shortages and panic, or gold would have risen like a rocket. None of that happened, so the deficiency in supply must have been met. Whoever met it now operates a vault with 1,500 tons less gold in it than it had back in 2014.

As noted in the same article, there was a deficiency of supply in 2014 of about 600 tons. That gold also had to have been supplied. Similarly, in 2013, there was a big deficiency of about 1,200 tons, but that particular gap was filled mostly by dishoarding from the fast-shrinking western ETFs. In 2014/15 and continuing to now, the only entity with the motive and resources to play "gold supplier of last resort" is the US Treasury.

If America’s gold hoard was previously 8,100 metric tons, it is now down to 6,000 tons. America's gold may still physically be resting in Fort Knox, West Point and the Denver Mint, but it is probably subject to a multitude of location swap liens and other legal encumbrances. These are owed to other nations like the UK, which probably forwarded the physical gold in 2014/15. They will expect to get that gold back someday, which means that a significant portion of the gold hoard of the United States is no longer our property, though it may still be in our possession.

As explained in June, the financial agent for the US Treasury is almost certainly JP Morgan Chase. They have an overtly disclosed contract to manage the Federal Reserve’s mortgage bond portfolio, and, I believe, they also have a covert contract to manage the US Treasury’s gold.That's important because, if we fast-forward to today, and look at what the big shots at JPM have to say, some of the statements leave people wondering.

For example, on February 11, 2016, in an oral interview on CNBC, Robert Michele, JP Morgan’s global Chief Investment Officer (NYSE: CIO), displayed a high degree of frustration when he seemed to throw up his hands and say "people have more confidence in gold than paper money.” It was a very puzzling statement and a bizarre emotional reaction on camera, given the fact that gold prices have been plummeting for 4.5 years! 

Using logic and common sense, we can only conclude that Mr. Michele’s comments must be understood in context. If top people at JPM already know that the deep drop in gold prices was artificially contrived, and that the continuing high level of physical demand is natural and real, the statements and facial expressions make perfect sense. He was simply expressing his frustration that JP Morgan Chase was unable to break the back of gold demand.

What is very important is that, in order to meet the supply deficiency, JP Morgan had to have been given carte blanche, by the Obama administration, to invade the US Gold Reserve. This fits perfectly with the fact that on April 11, 2013, one day before the gold price began to fall dramatically, on April 12, 2013, the President and Secretary of the Treasury met with members of the so-called "Financial Forum", which are the 13 CEO's of the largest financial entities in the world. 

Have they they thrown away thousands of tons of American-owned gold and accomplished nothing?I believe that they have. That was why there was so much frustration reflected in Mr. Michele’s voice, at least in my view. Sooner or later, the hemorrhage of American gold had to stop. To stop it, gold prices have to rise to a level at which supply balances out demand. But, it won't happen at once.

Money can be made on short term short and long positioning, during the process of gold price normalization. It will be a step-wise process. The reason is simple. Physical buyers are very price sensitive. When prices go up by $50 in one shot, they will stop buying. The price doesn’t have to go up much to tamp down demand temporarily. But, the sudden bouts of cheapness don’t last long.

The hesitancy to buy exhausts itself as physical buyers get used to higher prices. Then, prices must go up another notch. Over the next year, expect sequential price increases. The price of gold will rise in bits and spurts. Up by $35, then down by $20, etc., as price point is tested by both sides, to see how much physical gold gets eaten up. At some point, maybe by the end of 2016, a point where the supply and demand is equalized will be reached.

If a new source of physical gold fortuitously appears on the way (like a fire sale by Venezuela?), it will be opportunistically used. But, the physical gold deficit in 2016 would have been over 2,000 tons if gold had stayed beneath $1,200 per ounce. So, even a few hundred tons from Venezuela isn’t going to stop the adjustment process.

Gold prices will now rise because a price must be found that discourages people from buying so much of it. My best guess is that this will lie somewhere near the place when supply and demand last balanced, which was in late 2012, somewhere between $1,500 and $1,600 per ounce. All this assumes that everything stays equal, and that the sovereign debt crisis doesn’t explode. 

If things don't stay equal, the sky is the limit. The bottom line is that, in order to understand gold prices, and make money from their movement, you've got to pay a lot of attention to politics. In 2017, if our new President is Bernie Sanders or Donald Trump, gold will do well no matter what else happens. Senator Ted Cruz wants to return to the gold standard.It will do even better under him.

Neither Sanders nor Trump derive large campaign contributions from Wall Street, and Cruz seems to get his money from pro-gold financial forces. So, gold price management will not be an attractive proposition to any of them. Gold will go up a lot in 2017 under any President, even if nothing significant happens.If we have a sovereign debt crisis, all bets are off. Even if a full crisis is avoided, however, it is very likely that we will see the insolvency of many more pension plans in the USA by the end of 2017. That is also going to propel gold demand and, therefore, prices.

If Hillary Clinton is elected President, given that she is the candidate most beholden to the big NYC banks, we will probably see a renewed effort to control gold prices. But, the USA is fast running out of gold. Clinton cannot change that. How fast prices will rise, though, is and will continue to be a matter of politics. If Hillary is willing to preside over the emptying of America’s entire gold reserve, the price rise will be slowed down, or prices may even decline for a while. But, in the end, they will rise as certainly as the sun will rise in the morning.