Thursday, March 29, 2012

Tick Tock

Central banks in the emerging markets increasing their holdings of gold has been a big part of the bull market in the metal. At the end of last year, official net purchases of gold started to rise dramatically. In the third quarter of 2011, central banks added 148.8 tonnes to their gold stocks, more than double the entire amount of government buying in 2010, according to the World Gold Council. Interestingly, the Greek central bank has been slowly adding to its holdings of gold, which would be sort of handy, should they happen to decide to re-introduce the drachmas one day  
That quote is from Matthew Lynn, a London-based financial journalist.  Here's the LINK from  The thesis of the article is based on comments from British Chancellor George Osborne, who stated the Britain needed to increase its "reserves," meaning that the Bank of England needs to begin stockpiling gold.

I bring this up because emerging market country Central Banks have been accumulating gold aggressively since 2010.  Not GLD, but physical gold sourced mainly in London and then - in many cases - delivered to facilities in the buying country.  The article linked cites the amount that has been reported to be purchased, but many of us who study this market strongly believe that countries like China have purposely understated the amount actually stockpiled.  It certainly wouldn't be the only case where a Government lies about economic/monetary numbers...

Now England is talking about accumulating physical gold.  At some point the ability of the paper fiat futures market to control the short term price of gold and silver will be eliminated by the sheer demand for physical gold/silver that is purchased and required to be physically delivered outside of New York/London bullion bank depositories.  These depositories, by the way, happen to be owned by the same bullion banks who make up by far the largest percentage of short interest open interest in New York Comex gold/silver futures and London forwards.

This brings me to the reason for the title of this post and the current open interest in Comex gold and silver futures.   The open interest report as of yesterday is as bullish as it has been since September 2009, which marked the beginning of the move that took gold from $950 to its 2011 peak of $1900.  I might add, for those of you who saw Jeffrey Christian's bearish remarks about gold yesterday, that Christian made the same bearish comments about gold at the September 2009 Denver Gold Show, right before gold made its 2-year run to just under $1900.  Wash, rinse, repeat.

Yesterday the Comex gold open interest dropped down to 407.3k contracts.  Because today is the final day of the "roll" period for the April gold contract, it will likely drop below 400,000.  The LAST time Comex gold open interest dropped below 400,000 contracts was 9/1/09, when it fell to 384,703.  The NEXT day it jumped up to 410,754 and gold began the move to its 2011 cyclical peak just below $1900.  During that run, open interest expanded to over  660,000 contracts. 

I call that move "cyclical" because, as veteran gold market participants know, the bullion banks use the Comex paper market as their manipulation tool.  They can't prevent ultimately the price of gold from going a lot higher over longer periods of time.  What they can do is short futures into the momentum-based hedge funds that charge into the market once the upside swing begins and then engineer an open interest liquidation which triggers hedge fund dumping, then shorting, and creates the heart-stopping price corrections.  The bullion banks use this selling to cover short positions established at much higher levels.  We have seen this cycle at least three times over the last 11 years - wash, rinse, repeat.

With open interest now back to late 2009 levels in gold and silver, we are on the cusp of another cyclical move higher.  It is quite probable that this move will take gold thru $2000 and up to at least $2500.  By virtue of the gold/silver ratio, that would imply a likely move for silver over $60.  I am throwing these levels out there conservatively.  Because the underlying fundamentals driving the price of gold and silver have strengthened significantly since the last cyclical peak, I am confident that we'll see gold and silver move to much higher levels on this next extended move. 

Here's the Comex open interest report as of yesterday's close:  LINK  Note that the silver open interest was actually up yesterday and that buying was concentrated in July and not May, the next front-month for silver.  That to me implies stronger-handed buying which will hang onto positions more readily than May buyers, who have to begin liquidating/rolling their holdings in about three weeks.  Silver o/i actually bottomed in December.  Everyone who trades this market agrees that the volatile price action in silver is the hallmark of an investment that is getting ready make a big move higher.

The bottom line is that the fundamentals AND technicals are now aligned such that they have created a high level of probability that the next cyclical move for gold and silver will happen soon.  I don't think it's coincidental that these factors are aligning with the likely announcement of the next big QE programs which will be initiated by the Fed, the ECB and the Bank of England.  It is now generally accepted that these programs have to occur in order to avoid systemic collapse...tick, gold?


  1. off topic...

    Help Me Put Jon Corizine in Jail

    Vote of No contains a section to send a message to all those members of the House of Representatives Oversight and Investigations Committee on Financial Services. For a change, we need them to start representing us instead of the large corporations. If we don't change their culture we will continue to be JPM's and Goldman's Bitch.. So I am in Bull Dog Mode today, help me by going to and vote your conscience.

  2. Nice post Dave. Heads down and full steam ahead!

  3. So British Chancellor George Osborne has stated that the UK needs to increase its gold holdings, where was he back in 1999 when Gordon Brown sold 60% of the UK's gold at the bottom of the market?
    At least Brown' bumbling shows that politicians in Europe are just as useless and cluelss as those in the US

    1. "At least Brown' bumbling shows that politicians in Europe are just as useless and cluelss as those in the US"

      Did it ever occur to you that selling half of Britain's gold wasn't a mistake. Maybe Gordon was bailing out a bullion bank? Or maybe the LBMA system was about to implode?

      Gordon Brown might be an idiot, but his puppet masters aren't! He did what he was told for a very logical reason. A reason us shrimps will never know about.

  4. MF Global's Collapse, Treasurer's Silence

    March 29 (Bloomberg) -- Douglas Burns, a former federal prosecutor, and James Koutoulas, chief executive officer of Typhon Capital Management and president of the Commodity Customer Coalition, talk about the probe into MF Global Holdings Ltd.'s collapse. Edith O’Brien, assistant treasurer at MF's brokerage, invoked her constitutional right against self-incrimination yesterday at a congressional hearing. Burns and Koutoulas speak with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

  5. MF Global Customer & Fund Manager on JP Morgan and the Goldman Connection

  6. Who Captured the Fed?

    Future generations will look back and ask themselves, 'How could they not see what was happening? Were they blind?'

    The Fed is not the only problem here, but a key enabler. White collar crimes and fraud flourished amongst the robber barons even in the days of the gold standard. It just was not as convenient, as easy, to defraud the people en masse through the debasement of the currency.

    The Fed has merely proven to be as vulnerable as the regulators and the Congress to the power of the monied interests. If the political campaign process had not been corrupted by money, if the fairness doctrine in the media and Glass-Steagall in banking had not been overturned by the mindless impulse to cast aside the best of the laws, many of the problems we have today would not be so great.

  7. Makes you wonder if this wasn't orchestrated ie gld, kgc?

    John Paulson Has A Problem...
    ME: You realize that if you just sit tight, everything will be fine.

    INVESTOR: …but if everyone else gets out and I don’t, I’ll get fired. Good luck. Nothing personal….

    There’s a reason that I no longer accept new investors in my fund. After 2008, I simply had enough of my investors trying to harm other investors through their actions. When your numbers are good, you get a lot of performance hogs, when times are tough, those same investors are the first to leave—but when they leave, it’s a nightmare because they all go at the same time.

    Paulson will continue to make denials, but I’m sure he’s facing redemptions. At the end of 2011, a number of his larger positions were heavily pressured into year end. The same thing is happening at the end of this quarter. Guys want out, and he’s forced to sell things that he doesn’t want to sell. If you own these positions, it’s frustrating. You can buy the bargains caused by this selling, but in three months, the whole cycle may start again. Even worse, there are guys with the inside details of who’s redeeming what and what will get sold. These guys are actively shorting these shares. They’re trying to force them lower. They’re trying to hurt Paulson’s performance and get the holders in the funds to redeem. Then they can cover on the cheap. At the very least, these guys want to short out their exposure to the more illiquid positions that Paulson owns. This cycle can go on for quite a few more quarters.

    You can count on guys shorting Paulson’s book. Until the redemptions end, you will see continued selling pressure. Be careful owning companies with big potential overhangs. Also remember, forced selling creates opportunities. the end his money is in the bank.

  8. Of course it has been orchestrated, Gold is never really worth what anyone thinks it is worth, it has been a commodity of choice, used with an assigned value for the purpose of exchange. I am sure that Goldman Sachs telling everyone to buy gold, buy gold, buy gold, is not only to make the buyers some money, but I am certainly it wont be hurting them either.
    Tick tock indeed. What goes up must come down, then go up, then down, then up, then down. It is the nature of the market, people just do not seem to understand how it works.
    On a sad note, I was just reading about a commodity worth even more than gold or platinum - Rhino horn - tragic.
    Great blog, keep it up.

    1. Incorrect. Gold is not a commodity:

      "The best way to rework the publics mind about gold money was by changing the way it was viewed.

      "It's money of course but let's also call it a "commodity! Then we can place a "paper" value on it and denominate it in all forms of future contracts. It will lose it's true value as money in peoples minds and be priced in an unrealistic paper format." And here we are today!

      The banks must sell all the gold they have to keep the system togeather. And once it is all sold and the financial markets implode the nations will use "whatever force is necessary" to pull the gold back in! That action in and of itself would show the true value of gold money!" (1997)

      "Gold is never really worth what anyone thinks it is worth."

      Incorrect, currently an ounce of gold is worth X amount of barrels of oil. If one of us shrimps can figure out how much Iran values a barrel of their oil in grams of gold then one can figure out the true $ price of gold.

      Iran Is Happy to Sell You Its Embargoed Oil for Gold

  9. Gold is precious metal and this represents the Country economy or its status symbol that represents Company economy. The demand of Gold is increasing day by day. Gold is worthy.