Gold and silver have been pounded lower over the past month, contrary to their bullish seasonals. This selling pressure has come from the usual suspects, American futures speculators. They’ve been busy aggressively dumping gold and silver futures, particularly on the short side. But each time they pressed this bet in the past 15 months, gold soon surged higher.
Shorts are bullish since they must soon be covered.
Silver has also seen a huge spike in speculator shorting, raising the odds it too is on the verge of its own parallel short-covering rally when gold’s starts.
Gold and silver had a bad week, with gold falling $25 to a low of $1262 by the Comex close Thursday, and silver by $0.50. Friday morning UK-time prices opened a little better on overnight physical demand, no doubt stimulated by those lower prices. The background to this poor performance was dollar strength relative to weak currencies, with the yen, euro and pound all declining sharply.
It feels like the market is drained of all positive sentiment, which is reflected in the very low level of open interest in the futures market. These conditions are more consistent with a market that is bottoming out than one that is about to fall sharply. Meanwhile retail demand seems to be stabilising, with growing interest for coins in the west, and weekly physical deliveries in Shanghai have quietly doubled over the last two months.
Demand for physical gold has the stealthy effect of increasing the gearing of the shorts in the paper markets.
In gold, we see MASSIVE new short positions have been taken by the large speculators and this plays right into the hands of the commercials for a soon to come price rebound.
These large specs added 12,983 new short contracts while their stops were tripped on the long side to the tune of 11,824 long contracts snuffed out of existence. As absolute proof that this latest price raid was an operation by the commercials, we see them covering -19,058 short contracts or almost 2 MILLION short ounces with a street value of almost $2.5 BILLION dollars into the latest smash!
When physical is this cheap you should be BUYING.
The precious metals plunged last week, knifing through key support zones to unleash an explosion of bearish sentiment. This troubling heavy selling wasn’t news-driven, it emerged out of the blue. Who was dumping gold and why? Later data confirmed it was American futures speculators short selling gold and silver at record levels.
Extreme shorting is very bullish, as these bets soon have to be covered.
Well, it’s a bit of an exaggeration, but for the first three days of this week daily turnover in the gold future fell to about 80,000 contracts, compared with a more normal level of 120,000.
At the same time volatility fell to as close to zero as you can get.
Silver is now set up for a major bear squeeze, but for the fact that both silver and gold have a recent history of weakness into quarter ends. Gold bottomed a year ago on 26th June at under $1200, and again at the same level on 30 December. It also sold off into the end of the March quarter.
No doubt this predictable price behavior has encouraged silver’s bears into a technically dangerous position.
A week ago, I suggested that sentiment had become overly bearish, and a “barbeque of the gold shorts” was possible.
That event occurred on Friday. More than 50,000 contracts changed hands,in just one hour of trading.
Gold now seems to be forming an inverse head and shoulders bottom pattern, and that’s good news for bullish investors.
Wow, what a COT week!
In gold, we have MASSIVE short buying on the part of the producer merchant to the tune of almost 15,000 contracts short picked up.
Notice the total commercials up almost 21,000 contracts short. That means they are getting VERY READY to do something big!
Gold has lost 25% of its value this year after 12 years of gains. There are credible allegations that the market was subject to price manipulation with banks manipulating prices lower through massive concentrated selling at times of low liquidity. Allegations that Chinese entities may be manipulating paper gold prices lower in order to buy physical gold on the cheap are gaining credence.
Whatever, the reasons for gold’s price fall it is a healthy development as it has led to the speculative hot money and weak hands being washed out of the market. Gold is on a much more sustainable footing now and is very much in strong hands now, which bodes well for gold in 2014 and 2015.
This week has seen a mighty struggle as the bears tried to push the gold price below the $1200 level. However on both occasions the price rallied strongly afterwards.
Both gold and silver paper markets are currently highly vulnerable to a bear squeeze. Silver has the added problem for the shorts that industrial users, who would have budgeted 2013’s cost of silver at over $30 last December have been buying futures to lock in windfall profits. At the same time with the gold price close to production costs, mine managers have sold gold forward into price rallies to avoid operational losses.
A few more trading sessions like this are likely to undermine the confidence that shorting gold is a good substitute for shorting bonds.
Legendary gold trader Jim Sinclair sent an email alert to subscribers tonight, advising gold investors: As Gold and Gold shares rise from the lows, do not sell. As the bottom of this reaction of the gold price sets in cement, please do not supply the shorts covering with your gold and good gold shares.
Sinclair states that Gresham’s Law is propelling gold back into an accepted monetary form, as the BRIC central banks attempt to accumulate 15% reserve balance in gold:
The economic axiom known as Gresham’s Law is operating in the Central Banks of the BRICs whereby gold is being accumulated with a goal of 15% of the reserve balance. The goal of 15% of reserves are the currency gold, and gold’s ascent in the marketplace due to the effect of Gresham’s Law to an accepted monetary form.
Sinclair urges precious metals investors to sit tight and hold onto their gold through the coming volatility as gold breaks through $3,500 and $4,00 and heads to $4,990/oz.
Sinclair’s full alert is below: