Chairman Bernocchio spoke yesterday and said what we knew all along…MORE QE, MORE printing and “we were just kidding about tapering” because the economy just isn’t that strong. Really? What was your first clue? The Fed has become a laughing stock of the world as different governors are trotted out who contradict each other on a daily basis. Tapering or no tapering, beginning this year, not beginning until at least 2015 blah blah blah. They have already lost control of the markets that they so dearly want locked down. Volatility has exploded and will go terminal.
It looks like the “plan” to extricate the U.S. banks from their poisonous short positions in gold futures was a winner. U.S. banks have gone from 106,000 net short contracts to 45,000 net long. This “long” position was created by duping the “specs” into going short a record 130,000 gross shorts. Look at this chart below for a moment, the last 3-4 months is when the spike in “paper shorts” took place.
Source: CFTC CEI Gold Non-Commercial Short Contracts/Combined, CMXOGNCS
They were selling gold that they do not (nor ever will) have. Now as my title implies “here we go”…because these positions represent locked in and guaranteed buying to cover. THIS is not “potential” buying power, no, this IS buying power. Yes I know, it is only in the “paper markets” but now the physical market will no longer have the headwind of manipulation to fight, the “manipulation” will be the first tailwind the gold market has had in over 15 years!
Of course this “tailwind” from the paper short covering positions will coincide with the physical demand that it created in the first place. The backwardation in London is now in day 4, the previous two occasions, 1999 (Washington Agreement) and 2008 (Lehman systemic flush) only lasted 2 days each time. I mention this because back in 1999 and 2008 there WAS “official” metal that was still available to “release” into the marketplace, I suspect that this is no longer true. I believe this is no longer true because the banks have switched from short to long because they “somehow” know or were “told” that the bottom of the barrel was within sight.
I do also want to mention that with the physical shortages that now exist, owners of far out futures will be induced into selling those futures and moving up to the current spot month or even the cash market itself. Fear of not receiving delivery will inspire this action which will be self-feeding and fulfilling. Nothing creates a shortage better than a shortage. I know, it sounds funny but when you are told that you may not or cannot have something…you want it all the more…AND you want it now! I suspect that the current backwardation will not be a short term event and the negative basis has much further to go before this is all over.
It took 3 months for gold and silver to be “collapsed” so that the banks could reposition themselves, as I mentioned this happened with, and created more, HUGE global physical demand. Now, we will see not only physical demand but also paper demand which will compete with each other. I will be shocked if it takes more than 3 months to recoup all…and then some. It looks to me like the “tapering talk” was merely a Trojan horse used to help the banks extricate themselves from their shorts, it worked!
No matter what Bernocchio Ben has to say in his waning months as Fed Chairman. Please understand that interest rates have already risen nearly 80% from their lows and oil is now $15 per barrel higher than they were 6 months ago. These will act as headwinds or taxes to the real economy, the Fed MUST continue to print, they MUST continue to purchase Treasury bonds and they MUST continue at full speed debauching the currency. ALL of this is good for gold and silver, only now the banks will make money when gold and silver increase in price. Nothing has changed. The fundamentals that were “in place” 3 months ago are still there, the only thing that has changed is that the banks are now, finally after more than 15 years…LONG and will benefit from higher prices!
It had to happen sooner or later; the “bottom of the physical barrel” had to be reached. It looks like this has finally happened. But, lo and behold the banks will benefit…what are the odds of this happening? The “markup” phase that I have spoken of so often is now fueled and ready on the launch pad, Ben just pushed the button. The price movement will shock many (most) and the amount of time for this to happen will be contracted…to allow as few as possible either in or back in. Get ready because “here we go!”
Bill,
It’s been a long time coming. We sure have waited long enough.
But if for some reason it’s not now, we can wait until the time is right.
I like your article and pray your conclusion is correct.
And if we wait some more we will just keep stacking !
the negative GOFO rates say that this is it.
I read more or less the same thing from Jim Sinclair last year. he didn’t give a time frame but said to just watch for when the big banks reverse their shorts and start to go long. I still see a choppy summer but maybe they are getting ready for the budget/debt fight to come in Sept. I’m going to add what I can here and there before then.
no choppy summer…here we go!
I was just looking at the recently updated BIS Table 22A Amounts Outstanding of OTC equity-linked and commodity derivatives.
http://www.bis.org/statistics/dt21c22a.pdf
As at December 2012 there were 486 billion dollars worth of outstanding OTC gold futures, swaps and options. In the OTC Other Precious Metals category which would include silver there were $157 billion dollars worth of outstanding OTC forwards, swaps and options.
If say a third or $50 billion of the outstanding OTC forwards, swaps and options in the Other Precious Metals category were invested in silver, this would amount to 1.5-2.0 billion ounces of silver at say $25-$30. Where is this silver or the $486 billion dollars worth of gold for that matter?
Who is short/long this market? Does the metal ever have to be delivered? Why does no-one talk about the OTC Precious Metals market?
The metal does not exist and thus cannot be delivered.
I just had a look at the Shanghai Gold Exchange Website.
http://www.sge.sh/publish/sgeen/statistics/index.htm
I believe that each contract is for 1kg of gold. If this is correct total gold delivered from January 2013 to the end of June was approximately 1200 tons. It would have been much higher except for the fact that between April 19th and May 28th pretty much no gold was available to be delivered due to the kamikazee gold/silver price smash on 12th and 15th April. If you extend physical gold delivery out on the Shanghai Gold Exchange for the whole year you are looking at a figure of 2400-2500 tons which is more or less the total amount of gold mined annually. The funny thing is that physical delivery for silver picked up in a big way after the gold ran out in April. The same thing is happening with silver demand in India with all the restrictions on gold imports.
With the negative GOFO rate now for four days, rapidly declining Comex and GLD inventories, declining scrap gold supply and miners reducing production, it really does look like it’s nearly game over for the precious metal suppression scheme.
yes it does.
Great article Bill. I believe TPTB miscalculated their intent. Did they not understand that by crushing the paper markets as they recently did, they provided one last buying opportunity of a lifetime in the physical markets before prices go to the moon? Judging by the demand now for physical PMs, I’d like to say to the lamestream financial media nitwits, PPPLLLFFFHHHH!!! (That’s the sound of me giving them the rasberry, though I wasn’t sure how to spell it! LOL).
Bill,
It doesn’t seem that ANYBODY that is suppose to protect the citizens knows what the H is going on or maybe doesn’t want to know. If it weren’t for you guys most of us would really be in the dark.
As Always Bill another great article. The price had to be taken down also because there will be another budget talk coming at the end of summer. There is a price spike coming and also there will be printing news coming. These two things alone back to back would actually have gold at $3000.00 plus and Silver at least $75.00. So now when the news comes out and the price of G&S being this low, it will not reflect the true problem in the economy. However, what is missing is there will be no physical metals available thus creating a consistent rising in price to get sellers into the market. But the current situation in this market does not support selling any physical G&S because there is no where to unwind the debts created.