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 Marketwatch.com.  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, tock...got gold?