During the 1970s, the Hunt Brothers concocted one heckuva cockamamie scheme. They decided that they were going to “corner” the silver market. To do this, they simultaneously bought physical silver and silver futures contracts. Silver futures contracts require that the seller deliver physical silver to the buyer in the future. The Hunt Brothers’ idea was to buy so much physical silver that it would be hard for the futures sellers to get what they needed to satisfy the contracts, and in their scramble to buy they would squeeze the market higher. At their peak the Hunt Brothers controlled somewhere between a third and half of all silver in the world, depending on which numbers you believe.

This seems like a good point in the story for a quick side quest. I’ve always thought that a good definition of “common sense” was “an emergency brake for your logic.” If thing “A” logically implies thing “B,” which in turn logically implies that you should buy all the silver in the world, “common sense” is the thing that should ride to the rescue and tell you that your logic is bad, even if you can’t see why, and you need to abort mission.

Back to the story. When their plan inevitably went south, the Hunt Brothers started getting margin calls. They needed to get cash quickly. When you need cash, you sell what you can sell, not what you want to sell. They couldn’t really sell their silver without tanking the market, so they sold their other assets - oil assets, real estate, and cattle to name the big three. Innocent bystanders in those markets saw a wave of selling pressure, saddling them with losses. The Hunt Brothers had historically been a friend to other investors in those markets, providing investment capital and bidding up prices. Not anymore.

Which brings us to why I am telling you this story now. Central banks have been a great friend to gold investors since 2010, stockpiling it as a way to store their sovereign wealth. However, many countries are seeing their fiscal positions degrade quickly from the elevated cost of their energy imports. This is dragging them into the same paradigm as the Hunt Brothers, and selling whatever isn’t bolted down. Turkey has been the canary in this particular coal mine, selling it hand over fist since the war in Iran started. They need the money! And they have been an important contributor to the fall in gold prices over the last month. What troubles us, though, isn’t just Turkey. We’ve identified 7 other countries who 1) have hefty energy import bills 2) hefty gold holdings and 3) some cracks that imply they may need to sell. There is no evidence yet that they are actively selling, but the longer this drags on, the more likely it becomes. And if they do, the gold market could have a real mess on its hands.

We think the secular trend of governments using gold instead of fiat-denominated assets as a way to store wealth is still in the relatively early innings. And, we think the turmoil in the Middle East is likely to strengthen that trend in the medium and long term. In our longer-term investing portfolios we have no qualms about holding gold. However, we think that in the short-term, there is the possibility of more pain, and in our tactical portfolios we are sitting this one out for a while until the specter of forced central bank selling subsides.