Friday, December 16, 2011

The Great Christmas 2011 Gold Sale

"A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men ... [W]e have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world­; no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men." 
 -Woodrow Wilson

From Bill Murphy on Planet GATA at The Lemtropole Cafe [subscribe!]

Europe and the US are going into mega money printing mode as the only perceived way out to stave off economic disaster … not that it won’t lead to the same anyway, but they are desperate and have NO other solutions which the politicians can handle and that the public on both continents can handle.

To deflect attention and assuage financial market concerns the leadership/bankers in Europe and the US made a joint command decision to bury the price of gold to take it off the inflation radar screen. To accomplish this objective and demoralize the sector they have used all of The Gold Cartel’s operational procedures and have succeeded in terrorizing the investment community. It has worked for the moment.

*By trashing gold The Gold Cartel and allies have created an illusion that gold is no longer a safe haven and not the place to be investment-wise. The fact the price has been up 11 years in a row and is still up nicely for the year has been discarded. This orchestrated attack has the Dennis Gartmans of the world proclaiming the so-called gold bubble is over.

He could not be more wrong about gold (what else is new)? While The Gold Cartel has arranged for physical gold to hit the markets via leased gold/official sector selling, and bombed the derivatives markets, some major players behind the scenes are buying heavily, according to my sources. They KNOW about The Gold Cartel. They know what they are doing and why. And they know this takedown will not stand, just like all the other ones have failed too.

This is very important to appreciate because the latest kill gold maneuver is much more desperate/revealing than ones in the past. The reason is not only are they are running out of available central bank gold to do their dirty, but they have been forced to mobilize leased gold, which will have to be bought back at some point. This is different, if I am correct, than in the past when The Gold Cartel leased gold which they never expected to get back, and probably have not … which is why the central banks only have half of the gold reserves they say they have in their vaults.

So, not only do we have major players accumulating gold on this break, we have future demand increased dramatically down the road. The lease sellers will be competing in the future to get their gold back vis-à-vis the buying of certain central banks, Indians, Chinese, and follow the trend western buyers when gold recovers.

For 11 years gold buyers in India, Asia and elsewhere have waited for opportunities to accumulate bullion on dips such as this one. It has worked every time and there is no reason for them to believe this dip will be any different. They are unlike western buyers who tend to be momentum and trend oriented.

These traditional, eastern dip buyers will be there, for the reasons to own gold are more powerful today than ever before. The Gold Cartel sellers are going to be forced to step back, and a VACUUM will gradually be in place. This is when gold steadies and begins to recover. At some point in the first quarter of next year, and it being a pivotal election year, western investors will see what the European/US bankers are really up to. There will be no denying it then and it will set off a gold buying binge like rarely seen before.

As this spree takes hold, the price of gold is likely to go into explosive mode. The move higher will be much more dramatic and faster than in years past.

By now we have all seen and considered the record negative lease rates on Gold as playing a big part in the recent take down in the price of Gold, despite no underlying fundamentals to support such a fall in price.

Whether this "take down" by the banking cabal was to aid the central banks wish to make "things appear better than they are" in the financial system by pushing down Gold prices, is really irrelevant.  In fact, after just two weeks of Dollar swaps, European banks have again run out of Dollars.  In effect, the "demand" for Dollars is exceeding the "supply" of Dollars.  As rising Dollar equals a falling Gold price.

The European banks have run out of "quality" collateral to swap for Dollars, and the only "good" asset they have left to sell is Gold.  By selling leased Gold, the European banks are able to raise the needed Dollars.  

But from where are they getting this Gold to lease, and subsequently sell to raise cash [Dollars]?

By Jeff Nielsen

In a fresh sign of bankster desperation, we recently learned that they have pushed lease rates for gold to the lowest, negative level in history – i.e. they are paying people more money to “borrow” their gold than at any other time. We know this is a sign of desperation, because back in the real world, buyers are paying premiums near record-highs to buy their (real) gold.

There are numerous implications regarding this latest bankster tactic to suppress the gold market, but before getting into those let’s explore all of the reasons why bankers like “leasing gold” in the first place. The starting point is to note that it is with gold-leasing that we see the beginnings of the banksters’ 100:1 leverage in the gold market.

A banker is holding a quantity of gold in his vault. He “lends” the gold to a trader, and suddenly you have two parties both pretending to be the “owners” of that gold. Naturally, the banksters also like the fact that this is a totally opaque, unregulated/unreported transaction. The banksters can secretly lend out their gold, and since the transactions are never reported, we lack the absolute proof that none of this “loaned gold” is ever repaid.

There is certainly plenty of circumstantial evidence on which to base such a conclusion, however. In order to review this evidence, we first need to know what is being done with the bankers’ leased gold. A detailed analysis by veteran precious metals commentator Frank Veneroso explains how and why “The ultimate borrowers in the gold lending operation are these shorts in the gold futures and forward market.”

We immediately see a second reason the bankers love gold-leasing: all of the “leased” gold ends up being shorted onto the market. What this directly implies then is that in order for these gold leases to ever be repaid the short positions must be closed out so that the gold (supposedly) backing the trade can be repatriated to the bank. However, what we see in the gold market is a huge, permanent short position in the gold market – which has swelled enormously since Veneroso wrote the article above nearly a decade ago.

We now know that at least some of these gold leases have never been repaid, since the gold that was loaned out remains on the market. However, as a matter of simple arithmetic we can deduce that few if any of these leases are ever repaid. As I noted above, each gold lease creates “paper gold” (i.e. a “fractional reserve” gold market) and increases the bankers’ leverage in the gold market.

We know from Jeffrey “I can’t keep a secret” Christian of the CPM Group that the gold market is leveraged by approximately 100:1. Yet just as every new lease increases leverage in the gold market, closing out any lease would reduce leverage by a corresponding amount. The combination of the permanently rising leverage, and the permanently rising short position provide irrefutable empirical evidence that little if any of this “leased gold” is ever repaid.

We can reinforce this conclusion further through common sense, and a basic observation of bankster behavior. Specifically, bankers never reduce their leverage voluntarily – the exception being short-term panic reactions each time their reckless gambling (again) pushes them to the verge of their own bankruptcy. However, as noted above there is zero empirical evidence that the banksters ever reduce their leverage in the gold market on even a semi-permanent basis.

Having supplied several powerful reasons as to why the bullion banks love to “lease” their gold (i.e. sell it to multiple buyers) begs the question: why aren’t the bankers always “leasing” vast amounts of gold to suppress the price? Hopefully that answer is obvious to regular readers. If you want to loan ton after ton of gold onto the market, you must have some original bullion to lend into the market in the first place.

Here is where we come upon a seeming paradox with respect to the recent explosion of gold leasing. We know that the banksters have virtually run out of their own bullion, as the evidence is absolutely conclusive. The same Western central banks which were openly selling 500 tons of gold per year onto the market every year have now all totally ceased their gold sales. They have no more gold…or at least they had no more gold.

Yet here we have the same bankers directly implying that suddenly they have lots of gold. It makes no sense to announce “the greatest sale on gold in history” – only to run out of inventory after the few first customers have bought their fill. Clearly the bankers have some new gold. This begs an even more obvious question: where did they get it?

Here, unfortunately, we must descend into speculation. However it is speculation which we can back up with yet more circumstantial evidence. As I noted in a previous commentary, as part of the “economic rape” of European economies, the bankers announced that they would be “willing to accept gold as collateral” for some of their (fraudulent) paper debts. How magnanimous of them!

As we all know, when Greece (finally) forced the bond parasites to absorb 50% “haircuts” on their holdings that was a default event. What happens when a debtor defaults on a debt? Collateral is seized. The latest statistics from the World Gold Council on official government reserves show Greece sitting with over 111 tons of gold. And as victims of the MF Global collapse have learned the hard way, our criminal governments (and the bankers who pull their strings) no longer see it as necessary to even report when they have taken something from people. Thus the bankers could have looted every ounce of Greece’s gold from its people and it could be months, years, or never before we finally find out about it.

One hundred and eleven tons is a lot of gold to lease, but it’s certainly not the only gold hoard onto which the bankers could have recently latched their talons. Those who followed the “Libyan revolution” will have recalled a remarkable flip-flop by the West.

At one moment, we had the vastly superior military forces of Muammar Gaddafi steamrolling the rag-tag, disorganized rabble we knew as the “Libyan rebels”. They were on the verge of collapsing. All hope was lost. Western leaders lamented that the lack of “UN authorization” prevented these upstanding citizens of the global community from doing anything to assist the rebels – and there was absolutely no sign of any “movement” in those negotiations.

The next moment, the same disorganized rabble which didn’t even have a military command structure (let alone a nation to command) announced they had created a “central bank”. About ten seconds after that announcement, Western leaders announce a “sudden breakthrough” at the UN, and a drafted-and-approved resolution instantly materialized. And before the ink was even dry on that document, war-planes from several Western nations were on the way to Libya to enforce a “no-fly zone”.

At that point we witnessed how much regard these Western nations had for international law. When following the UN mandate and merely enforcing the “no-fly zone” was not producing the result these nations desired, they simply tore up the resolution and threw it away. Instead, they began carpet-bombing any/all areas under the control of Gaddafi, slaughtering his ground forces (and large numbers of civilians) in what is a textbook example of “war crimes”.

This brings us back to the pivotal moment when Libya’s central bank was created. What possible purpose could there have been for the rebels to create a central bank before they had even created a real army to take control of the country? There was no “banking” to be done. And yet it was the creation of that symbol which was the obvious catalyst for a massive military commitment by the West.

One thing we do know about central banks is that they are the official receptacles for a nation’s gold reserves. Turning again to WGC statistics on national gold reserves, we see that Libya had even more gold than Greece, 143.8 tons to be precise – and more than enough for a group of gold-hungry bankers to instruct their lackeys in government to mobilize their war-machines.

Let’s summarize the facts. We had Western central banks totally running out of any gold to sell onto the market, with all gold sales having ceased for more than a year. Suddenly, we have the bullion banks announcing they have so much gold on their hands that they are doing more than just giving it away, they are literally paying people to “borrow” it – in the greatest “gold sale” in all of history.

We have the same bankers announcing that the gold of Greece was now “collateral” for its sovereign debts. We then had the Greek government defaulting on those debts, directly implying the seizure of that collateral.

We had the”rebels” of Libya on the verge of total annihilation, while Western governments claimed they were helpless to intervene because it was “against international law”. We suddenly saw the rebels create an official receptacle for their nations gold, and then had those same Western nations instantly launching a massive military intervention into Libya, where Western governments flagrantly disregarded international law while committing their war crimes.

You be the judge.

For newer or more timid investors in the gold market who fear that this latest operation is somehow an indication of bankster omnipotence, relax. It was less than two years ago that the scheming banksters thought they could torpedo the gold market through getting the IMF to dump 400 tons of gold onto the market (50% more gold than that of Greece and Libya combined).

What happened then? As soon as that gold hit the market, India swallowed-up half of it in one gulp. The price of gold was permanently launched above the $1000/oz mark – and the gold market has never looked back since.

We know that the banksters are capable of depressing the price of gold over the short-term. We also know from the six-fold increase in the price of gold over the past decade that they are losing this “war”. Meanwhile, it is only a matter of time until the masses realize that the worthless paper in their wallets is worthless. Sounds like a great time to buy gold – on sale.

Something quite curious is going on in the Precious Metals with regards to the Open Interest in the futures market...particularly in the front month of December.

Harvey Organ in his Daily Gold And Silver Report makes the call:

The total gold comex OI mysteriously rose by 8299 contracts despite the massive whacking these past two days.  The bankers were not amused that no gold leaves left the gold tree.  The front delivery month of December rose for the sixth straight day as we saw its OI rise from 1810 to 2317 for a gain of over 500 contracts. Generally when this happens you get a whopper of a delivery and sure enough last night we received notice that 1823 notices for 182300 oz of gold were served upon our longs. The next front month of February saw its OI rise from 259,454 to 261,629.  The estimated volume at the gold comex today was 197,979 which is pretty high considering no rollovers.  The confirmed volume yesterday was also an astronomical 307,663 and to have no contraction of OI with the raid is simply amazing.  The CFTC commissioners should have a close look at this data.

The total silver comex OI rose by over 4000 contracts which is just as amazing as gold.  The price of silver fell by over 2 dollars per oz and yet the OI rises???  The front delivery month of December saw its OI fall from 369 to 269 for a loss of 100 contracts.  We had 66 notices filed yesterday so we lost 34 contracts to cash settlements.  The next front month for silver is March and here the OI rose by over 3000 contracts to 57,037 from yesterday's level of 53,771.  The estimated volume today was tame at 47,325.  The confirmed volume yesterday, with the huge raid came in at 86,375.  Many of those trades were HFT trades.

The mysterious rise in Open Interest as the prices of the Precious Metals falls is a bit confounding.  Clearly, with this observation, we can be relatively certain that the recent price drops in Gold and Silver are NOT due to speculative long liquidations. We can speculate that the rising Open Interest, while prices are falling, could be a sign that the speculators in the Precious Metals have been emboldened to go much more short Gold as price fell below the 200 day moving average at $1621.  This would be ideal, and set up the possibility that any move to the upside could be quite explosive given the need by the banks to repurchase the leased Gold they have sold into the markets if indeed all that Gold was hoovered up during The Great Christmas 2011 Gold Sale by gold buyers in India, Asia and elsewhere that have waited for opportunities to accumulate bullion on dips such as this one we are currently witnessing.

If speculators are taking or adding to short positions in Gold just because Gold has breached its 200-day moving average, be forewarned...this has proven to be a very bad idea over the past 11 years:

From ZeroHedge

Many are doing their damnedest Ph.D.-best to somehow fuse economic theory and technical charting, and state that a breach of the 200 DMA in gold is indicative of imminent price collapse. And then there are facts. Such as this nugget from Stone McCarthy which looks at previous episodes of the 200 DMA breach and concludes based on severity of trendline penetration compared to average, that "this is just one reason we see strong potential for a rebound as participants reduce short exposure." So much for technicals.
Full note from SMRA:
For the first time since January 2009, gold closed below its 200-day moving average on Wednesday. Today's Chart of the Day puts Wednesday's -2.8% violation of this long-term smoothing line into perspective, by comparing it to the average violation of both the general and upward sloping 200-day average since 1999.

The slope of a moving average is something that many analysts fail to address when trying to determine potential turning points on a chart. Although gold has been working lower for more than 3 months now, the current upward slope of the 200-day line reinforces the fact that gold's long-term trend is still to the upside.

If we simply consider the general direction of the 200-day moving average since the start of the yellow metal's secular bull move in late 1999, gold's average distance below this line is -3.70%, with a maximum undercut of -19.2%. On the other hand, if we only consider gold's performance when the slope of the 200-day line is higher, the average violation is -2.19%, with a maximum undercut of -10.8%.
And SMRA's short-term preice implication conclusion:
On its own, gold's -2.8% violation of the 200-day line on Wednesday has already surpassed the average violation dating back to 1999. Short-term, this is just one reason we see strong potential for a rebound as participants reduce short exposure.
Lastly, absolutely none of this matters one iota when the central banking cartel resumes printing.

Adam Hamilton in 2004 wrote a wonderful essay with regards to Gold and it's 200 day moving average.  He devised a technical indicator called Relative Gold [rGold] to determine when to buy or sell Gold based on it's price relative to its 200-day moving average:

I call this indicator Relative Gold, or rGold for short.  Like the majority of technical indicators it is simple in concept and easy to calculate, but it offers many additional insights not readily apparent on a standard gold price chart alone.  Relative Gold is computed by dividing the closing gold price by gold’s 200-day moving average.

The idea behind rGold is that gold’s price relative to its 200dma can help speculators discern when the probability for a short-term turn in the gold price is high or low.  The 200dma is one of the most important lines in all of technical analysis and forms the foundation for rGold.  200dmas are extremely crucial technical levels for several reasons.

In any major trend, bull or bear, countertrend pullbacks to the 200dma of the primary long-term trend are expected and normal.  Due to its very mathematical nature, the slow 200dma is the baseline off of which most secular trends flow and ebb.  If you are in a bull market and long-term fundamentals are still in your favor, any close convergence of a price with its 200dma usually marks a fantastic buying opportunity.

You can read more about Adam Hamilton's Relative Gold Indicator here.  It would be well worth your time, and after doing so, I think you would agree that we are staring at a tremendous opportunity to load the boat with Gold [and Silver] right here and now.

From Dave in Denver, The Golden Truth
"This is my favorite time of the year and I'm in a great mood for receiving this year"  - Mike Greenberg, Mike and Mike in the Morning on ESPN.
I'm in a great mood right now to receive any news whatsoever that the CFTC is going to crack down on the illegal manipulation that has been going on in gold and silver futures trading on the Comex for a couple decades now.  But I know that won't happen - just ask the customers of MF Global what they think about the willingness of the CFTC to enforce the law.  And so the saga of the United States of Banana Republic continues.  I'm really excited to receive the eventual newscast that shows Jon Corzine walking away from his MF Global crime with little or no consequences.

I don't want this post to be a rant about the Government's complicity with the massive manipulation of the markets, especially gold and silver, but anyone who does not understand that this plays a big factor in the short term movements of gold and silver is unequivocally a complete idiot. The golden truth is that on a longer term basis, the manipulation doesn't work other than to scare the shit out of most people and keep them from taking advantage of the enormous wealth-building opportunities it presents.  Here's a quick comment from Ted Butler on the matter - I've included a chart below that shows the technical aspect of the market Butler describes:
What I didn’t explain in my weekend commentary on Saturday was that the next logical downside trigger point in gold for selling by the technical funds and traders was the 200 day moving average ($1610). This particular moving average had not been broken in gold for almost three years, back to when gold was under $900. The longer a moving average remains unbroken, the more significance it holds to technical traders. This level has now been broken as well, encouraging those holding gold on technical or price movement grounds to sell. This selling begets other selling as fear of further losses resonates through the market as prices plunge. The price declines step up demands for more margin, prompting further long liquidation.

Given human nature and our collective demand for easy to understand explanations for why prices are falling there will be, for sure, all manner of supply/demand explanations given to justify the price rout. But there have been scant signals from the real world of supply and demand to account for the decline in gold and silver prices. At the core, this is strictly another COMEX-commercial rig job. That it has been highly successful for the commercial crooks is unfortunate in many ways, but encouraging in other ways. The proof that it is another COMEX rig job is fairly easy to demonstrate in past and future Commitment of Traders Reports (COT), as the commercials are always big buyers on these price smashes. We have only gone down in price so that the commercial could buy. It’s not possible that the commercials can always be big buyers on such declines for any other plausible explanation. That the CFTC sits by, even though it has been armed with new anti-manipulative regulations is as shameful as it gets.
Here's a 6-year daily chart of the Comex gold futures continuous contract:

(click on chart to enlarge)

THAT, my friends, is a snapshot of one of the most perfect bull market charts that you will ever see.  You really couldn't make one up that was better.  The red line is the 200 day moving average (200 dma) to which Butler refers.  You'll note that the corrections in 2006 and 2008 on a percentage basis were much worse than what we are in right now.  That's not to say that I'm calling a definitive bottom here, but the data suggests that IF gold does break the 200 dma to the downside, it doesn't stay there very long.  I have been lucky enough to start adding to my positions every time this happens in the last 11 years and feel that it's a bit more than luck that it's worked out for me. 

Now we've all heard the Dennis Gartmans and CNBC retards and others proclaim the end of the gold bull market.  I can't tell you have many times I've heard that in the last 11 years.  I remember vividly when gold ran thru $350 in early 2003 and started to correct.  Robert Prechter of Elliot Wave fame issued a definitive warning that the gold bull market was over and gold was going to fall back to $50.  Hmmm...The common theme between Prechter and Gartman is that NEITHER of them manage a fund or commit their own money.  They make a lot of money selling newsletters with shitty advice in them to ignorant financial advisers and frightened, lemming investors.  Neither of them has any skin the game.

Here's a "technical" chart that you won't find in Gartman's letter but I will give it to you for free.  Unfortunately Eric Hommelberg does not freely publish his work anymore but he follows a metric known as Rgold.  This is the spot price of gold divided by the 200 dma of gold.  The chart I have only shows 2004-2008, but you'll note that whenever the Rgold metric goes above 1.20 it is a definitive "sell" signal AND whenever it goes below 1.00 it is a definitive "buy" signal.  Right now that measurement is .93.  .93 = BUY with both hands.  Here's the chart: 

(click on chart to enlarge)

I have several articles to cite in my argument that gold is likely close to reaching a bottom in this price correction, which actually began at the end of April.  To keep this post reasonably short, I'm going link the articles with very little commentary.  

The highly respected Peter Grandich has issued a $1mm bet challenge to Dennis Gartman, Jon Nadler and Jeffrey Christian - three morons who routinely issue doom warnings about gold and yet who are always wrong in their market calls.  None of them have skin in the game but Grandich is giving them an easy opportunity.  Please read this link in its entirety - Grandich has arranged for a law firm to set up an escrow account if any of these three dopes decide to show some conviction behind their drool:  LINK

Zerohedge has posted an excerpt from a Citicorp market research report that explains why they see gold going anywhere from $3400 to $6000 over the next two years.  They cite technical as well as the usual fundamental reasons for this.  This is very significant because it is the first time in 11 years that a large, Too Big To Fail Wall Street bank has issued a bullish call like this on gold:  LINK (no, this isn't the end of a bubble because Citi has become bullish - there's still 10 other Too Big Big To Fails that are extremely bearish on gold).

This could be one of the best signals yet that gold is getting ready to form a bottom and turn around:   the sentiment index as measured by Marketwatch's Mark Hulbert is registering very high levels of negativity.  Please note that Hulbert points out this contrarian indicator is right more often than it's wrong, which means that the negativity of investors toward gold is actually very bullish:  LINK  I can confirm this measurement because there's been an usually high number of commentors lately on this blog who are thinking about dumping their holdings.  I will buy what they sell.

Whenever I need a little "conviction-check" - some "couch time" - with regard to my fear levels, I like to spend time reading what Jim Sinclair has to say.  Eric King made it easy with this interview of Sinclair.  Please note that he thinks this high volatility in gold right now indicates that gold will go higher than he expects. This quick interview is well worth reading:  LINK

Finally, please keep in mind that ALL the fundamental variables that are driving the gold bull market keep getting stronger by the day.   Congress and Obama are getting ready to pass a huge spending bill which extends the payroll tax cuts and extends jobless claims.  This means that the spending deficit for 2012 will be much larger than projected back in September and the amount of debt the U.S. Treasury has to issue will be even greater than projected when the debt ceiling was lifted.  Expect another debt limit ceiling extension fight before the November 2012 elections or just after.  This means that Fed will be forced to roll the printing presses or the Government will not be able to fund all of this new debt issuance.  Hell, we didn't even have debt ceiling limits and massive deficit spending  and high unemployment as problems when the gold bull market began.  As these problems get worse, the case for gold going several multiples higher from here gets better.

One more thing to think about:  how many of you have financial advisers calling you to tell you that it's time to sell your gold?  How many of you have advisers calling you and telling you it's time to buy or add?  I would bet my last nickel that over 90% of all advisers are calling and telling their clients to sell.  I would also bet that those are the very same advisers who advised their clients to stay away from gold for the last 11 years.  If I had an adviser like that, I would hang up the phone and find a new one.

The moral of our Christmas story today then is:  Be vary wary of going short in a manipulated market when price crosses below a rising 200-day moving average.

From ZeroHedge

Yesterday when gold was trading in the $1570 we suggested that based on the very volatile shifts in the funding environment for gold, whereby the gold lease rate had moved from record negative to borderline flat, the plunge in the yellow metal is likely coming to an end. Less than 24 hours later, gold has just passed $1600 yet again. And as the following note from Sandeep Jaitly of First International Group (whose interview with Max Keiser exposing economics for fraud back in June was quite the hit) observes, by analyzing the continued funding unwind pressure, the recent liquidation move in gold is one that has to be taken advantage of. To wit: "The movements in the bases confirm that the recent downward move in gold against Dollars was as a result of Dollar funding pressures. Gold was lent on the swap against United States Dollars. This swap must be unwound and where a bid for gold was sought to raise Dollar liquidity, an offer of gold will be sought to unwind the swaps. The co-bases for Feb-12 and Apr-12 gold contracts are starting to advance – an exceptionally bullish signal following the selloff and a sign that physical buying is being prompted by these lower prices. It would be very prudent to accumulate gold against United States Dollars aggressively over the next fortnight."

From First International Group, Gold Basis Service

LONDON, Thursday 15th December, 13:43 HRS BST. Spot gold is currently $1,584.25/45, and the gold/silver ratio is currently 54.56/54.63. The conclusion from the last missive sent on 23rd November read:

“The movements in the December gold bases are still pointing to further upside for the gold price in fiat currencies – especially the Dollar, Euro and Pound Sterling (note the drop of just referring to the United States Dollar.) The ratio of the December gold/silver bases is pointing to downside for the gold/silver ratio.”

Gold was $1,687.15 bid at the time. Subsequent to that, it rallied to a high of $1,763.01 on 2nd December, before falling back to its current $1,584. The movements of the basis and co-basis during this time told all.

The chart to the left displays the normalised co-bases for The Dec-11, Feb-12 and Apr-12 COMEX gold contracts (left hand scale), as well as the gold price on the right hand scale.

Point 1 on the chart shows the December contract going into backwardation (a high of +0.7% was reached on 30th November), just as the price of gold began to escalate. Point 2 shows the backwardation in the December contract starting to decrease and fall rapidly – a few days ahead of the contraction in the price from 2nd December’s high. Point 3 shows the co-bases for Feb-12 and Apr-12 advancing higher towards a possible backwardation (likely to occur by the beginning of January by historical standards.)

A lot of reasons have been given for the correction in the gold price – futures liquidation being a prime candidate. However, this is not the case as movements in the bases tell otherwise. There has been continued Dollar-based funding pressure in the money markets of late (witness the escalation in LIBOR which has doubled over the past few months.) The escalation in the gold lease rates – that prompted gold to go into backwardation – was caused by gold being borrowed with the intention of providing Dollar liquidity (by selling the gold in a ‘sale and repurchase’ transaction.) The fall in the gold price being accompanied by a fall in the co-basis points to signs of physical gold being liquidated not futures. Massive futures’ liquidation would see the co-basis rise and basis fall – the complete opposite of what actually occurred.

The salient points to remember here are: that the borrowing of gold caused lease rates to escalate above money market rates and that gold was borrowed ‘on the swap.’ The former point can only be explained by the fact that the physical gold market is very tight (in terms of both supply, and loanable gold.) With the latter point, one must remember that swapped (and sold) gold must be returned (and therefore bought.)

The Feb-12 and Apr-12 COMEX gold contracts are already advancing towards backwardation with the co-bases for each having bottomed on 9th December (Point 3 on the chart above.) This is an exceptionally bullish sign for gold priced against fiat currencies. As the gold price has been correcting, physical interest is dominating the gold market.

The amount of gold stored at COMEX warehouses remained static over the past quarter as can be seen in the chart on the left. 

However, there was an important mix shift at the end of November into December: around 1m ounces of gold (around 10% of total inventory) was shifted from the ‘eligible’ category to the ‘registered’ category. That is ‘registration’ for sale. This again points to gold on the swap being the cause of the price decline.

The gold/silver ratio has remained range bound, currently at 54.56 bid v. 53.16 bid at the last missive. There is insufficient data for 2012 contracts to provide a change in this stance.

The fourth quarter’s Course of The Exchange will be published soon. As patrons of this service have known since the beginning of the year, the Dollar’s resurgence against other fiat currencies was expected. We will be reiterating the (unchanged) reasons for the continuance of this trend going forward. Issues surrounding the Eurozone will be covered from a multi-century historical perspective. United States equities, bonds or both for 2012? This will be a central issue to be discussed as well.

CONCLUSION…The movements in the bases confirm that the recent downward move in gold against Dollars was as a result of Dollar funding pressures. Gold was lent on the swap against United States Dollars. This swap must be unwound and where a bid for gold was sought to raise Dollar liquidity, an offer of gold will be sought to unwind the swaps. The co-bases for Feb-12 and Apr-12 gold contracts are starting to advance – an exceptionally bullish signal following the selloff and a sign that physical buying is being prompted by these lower prices. It would be very prudent to accumulate gold against United States Dollars aggressively over the next fortnight.

1 comment:

  1. Im so curious about gold market these days, what about competing with real estate.

    Houston gold