Tuesday, December 20, 2011

Time To Jump On Board The Gold Train - It's Warming Up To Leave The Station

After an 8 month price correction that has been mistakenly taken to be a new bear market by those who are clueless, like Dennis Gartman, it appears that the gold bull is kicking at the gate:
Interestingly, so many people are bearish on gold right now and looking for a collapse in the price of gold.  They don’t understand what is happening in the physical market.  The bullish fundamentals I just described to you have enormous implications  -  London bullion trader
Here's the short interview which is the source of that quote:  LINK  It is a must-read and the report of large "entities" going directly to gold producers in order to source large quantities of bullion is consistent with other industry insider accounts of this.  I linked one a couple weeks ago.

"Interesting" from my viewpoint because I have pointed to some indicators that likely signal that we are near or at a bottom and that the next extended move higher in gold will likely take us to a new record nominal high in gold. 

One of these signals as discussed yesterday is gold breaking its 200 dma to the downside.  Currently the 200 dma is around $1618 using the Comex continuous futures contract (this would correlate to around $1615 on a spot price basis).

Another signal would be the current long/short Commitment of Traders (COT) structure of the hedge funds (large specs) and the big banks (commercials).  For the duration of the gold bull market, market bottoms have been associated with a low relative net long position being taken by the large specs and a low relative net short position being taken by the price manipulating bullion banks.  That this is the case is indisputable.  Currently the large specs have a very low net long position and the banks have low net short position.  I rehypothecated Ted Butler's latest remark on the COT structure from Ed Steer's Gold & Silver Daily: 
I think the gold COT structure is back to a bullish set up, especially if the improvements after the cut-off are what I think them to be. As such, gold may also be at a price bottom, especially considering the bullish signals (or lack of bearish signals) coming from the gold physical market (ETF holdings, etc.). But to be fair, while gold is near bullish COT readings over the past year or so, on a much longer historical basis there may still be room for further liquidation. My personal sense is that we probably shouldn’t see big further speculative long liquidation in gold and may, in fact, be good to go to the upside. But if the COT structure in gold is bullish (as I think), then silver’s structure is screamingly, super-duper bullish.
Combined, the 200 dma plus the COT signals are quite bullish for gold.

One indicator that I have not seen commentary on is the COT set-up in the euro, and tautologically, the inverse set-up in the dollar.  Currently, the large spec hedge funds are record short the euro, which means they also are very long the dollar vs. the euro.  Conversely, the big banks are primarily the entities which would take the other side of the hedge fund bet, meaning the big banks are very long the euro and very short the dollar.  This is very very bullish for gold. Take a look at this chart rehypothecated from http://www.barchart.com/

(click on chart to enlarge)
The green line that goes below zero starting in May is the short position of the large specs.  You can see how the hedge fund position has shifted from long to short this year.  The red line is the long position of the big banks.  Why would the euro begin to move higher again rather than collapse, like everyone seems to think will happen?  Because I have said all along that I wouldn't be surprised if the EU figures out a way to save itself from extinction.  Hell the U.S. is already printing money to bail out Europe via the up to $1 trillion currency swap facility arranged by the Fed.  This is a de facto QE because it increases the size of the Fed balance sheet until the swap unwinds, if it ever does.  This is printing and this is dollar bearish.  Just wait until the Fed has to start printing to fund 2012 Government spending programs...Don't forget, what's bearish for the dollar is bullish for gold...


  1. ha...rehypothecated Ted Butler's remark. nice one.

  2. Great post as usual Dave.

  3. Dave I'm keeping a very close eye on the elephant in the room("CHINA") There housing bubble is huge and as I post,starting to pop.The effects of this on Chinese banking will take a "HUGE toll".As well,the timing of this along with the global problems of the European union is ugly.Commodities would be ripe for a big hit,and as for gold the bigger there problem the bigger possible hit on Gold&$ilver in the coming year.Large billion leasing along with sales for liquidity seems to be the flavor of the day.I totally believe in gold,I just dont know how what I speak of will play out on its pricing in 2012.And the $tock markets led by the U$ with its $15T ballooning debt will be toast.Yes it will be interesting to see if the physical side of gold will finely be truly recognized,or papered over as usual.

  4. Yes, Bullish for gold. The EUrosystem already has it's way out. Collectively, it has the largest holding of physical gold in the world (according to official statistics--if you trust them).

    Though ... it's somewhat misleading to look at the WGC list, since they itemize by nation (Jesse's chart shows the Eurosystem as a whole at numero UNO).

    Regardless, the BIS sees them as a collective Union and their CBs mark gold reserve to market quarterly.

    Therefore, after the revaluation, their gold will be their currency's way out, due to it's relationship to their reserve asset base.

    Let the FED print Europes way out of its dollar denominated debt, as it measures it's own QE against reserves.

  5. How could you not get on the train?

    Obama and Geithner: Government, Enron-Style
    December 20, 10:06 AM ET
    Jeff is one of the smartest guys on the Hill and is particularly strong on issues surrounding Wall Street and the regulatory system. In this piece, he takes apart the oft-stated mantra that what Wall Street firms did during and after the crisis was maybe unethical, but not illegal.

    He takes particular aim at Barack Obama, who recently tossed that line out on 60 Minutes in what I thought was one of the real low moments of his presidency.

    The notion that what Wall Street firms did was merely unethical and not illegal is not just mistaken but preposterous: most everyone who works in the financial services industry understands that fraud right now is not just pervasive but epidemic, with many of the biggest banks committing entire departments to the routine commission of fraud and perjury – every single one of the major banks, for instance, devotes significant manpower to robosigning affidavits for foreclosures and credit card judgments, acts which are openly and inarguably criminal.

    Banks and hedge funds routinely withhold derogatory information about the instruments they sell, they routinely trade on insider information or ahead of their own clients’ orders, and corrupt accounting is so rampant now that industry analysts have begun to figure in estimated levels of fraud in their examinations of the public disclosures of major financial companies.

    Read more: http://www.rollingstone.com/politics/blogs/taibblog/obama-and-geithner-government-enron-style-20111220#ixzz1h8Ftlzva

  6. LOL. I was wondering if anyone would notice that used "rehypothecated."

  7. Dave, I love your blog. Thanks for the almost daily updates! In the near future, could you please address the mining shares? There are some relatively well known precious metal "experts" who I will not list saying to get out of mining shares since they will continue to under perform and because your money can be stolen like MF Global. I may be an amateur, but I find that hard to believe, but what do I know especially what is happening these days. I know you invest in miners so would love to hear your opinion.

  8. Thanks for the feedback on my blog.

    My personal view, and that of several well-regarded market analysts like Eric Sprott, John Embry and James Turk, among others, is that the mining shares - in relation to the current price of gold and silver - are about as cheap as they've been for the duration of this bull market. Some of these stocks, especially juniors with proved reserves, are retardedly cheap.

    Having said that, the miners are subject to massive short-selling and manipulation. How else would you explain the 10-15% move higher today in stocks like AUMN, TRX, FSM and GSS. All four are highly manipulated and have very a high short interest.

    Having said all of that, I have always believed that one of these days the type of situation that occurred with MF Global could and would happen at the big bank-owned brokerages. I've always felt that keeping money at ANY financial institution would eventually become risky. But I also think we'll see some substantial upside in all stocks as a result of hyper-printing by Central Banks.

    I believe in my ability to judge when it will be too risky to keep money in stocks at a brokerage firm. We're not there yet but the MF thing certainly is a shot across the bow.

    The only way to truly insulate your wealth from the ravages of an insanely corrupt financial and political system is to move everything into physical gold and silver and keep it under your own watch. That has always been the case.

    But for now, I am seduced by the siren's song of the serious upside potential offered by the mining shares and as such I think, for now, the potential returns outweigh the risks

  9. Hi - always enjoy your posts.

    Once you have wiped the sleep out of your eyes ....

    Could you explain this ECB bond offering. I thought that there will not be any Euro Bonds in any circumstance!! Is there a difference?

    Until later - thanks

  10. Thank you Dave for the continued updates your blog is as precious as the precious itself.

    A very Merry Christmas to you and yours, 2012 is shaping up to be one of the most exciting years of our lifetimes both good and bad.

    Prosperity and good health too you always


  11. Thanks Bill. Happy holidays back at you and thanks for you comments during the year.

    re the ECB loans to EU banks. Your question actually brings up an interesting distinction between "QE" and a simple liquidity facility. The ECB said that there would not be any bond purchases by the ECB, which is what is defined as "QE" because it involves printing money and expanding the Central Bank balance sheet. Loans, however are not regarded as "QE" because it involves a fixed time commitment for the borrower to pay back the loans. In this case 3 years. So the argument (not mine) is that this is "sterile" money in that it did not involve a permanent increase in the money supply.

    I disagree with the official declaration of what these loans are because they actually create potential for an increase in amount of credit available to the economy by the amount of the ECB loans multiplied by the multiplier derived from the bank reserve ratio requirement. This assumes all of the money loaned by the ECB is reloaned out by the bank recipients. My bet is that a lot of this money is being used to bail out the banks who are taking the loans and therefore will not have the same multiplier effect on the temporary money supply. HOWEVER, we should all be concerned by the size of the loans in relation to what was expected because if these loans were primarily used to keep the borrowers alive, there is a big risk they will never be repaid and therefore represent de facto QE.

    This event further bolsters the case the gold.

  12. Dave-

    Thank you for the great posts, they are invaluable to newcomers into the precious metals market like myself. Now for a quick question to whoever may want to respond. I have heard talk lately about the separation between price in the physical and paper precious metals market diverging. How can this even begin to happen? When metals dealers such as APMEX etc. derive their prices from the paper price, why would anyone in their right mind pay MORE for physical than the lower paper price even if it is manipulated? Would it not then be possible for the banking cartel to keep the pm's price lower for however long they see fit without worry of the price of physical increasing? Any enlightenment would be greatly appreciated.

  13. Two ways to look at that question:

    1) there have been enough "insider" accounts of large futures (Comex) and forward (LBMA) positions being paid off in cash at 15-25% premiums to spot that it is likely a fact. This means that the entity that is short the contract can not make good on delivery and is willing to pay a premium in paper money to satisfy the claim. That's a price divergence of paper from physical.

    2) Lets say that an entity like China decides it wants to buy a large chunk of gold in one shot - like 500 tonnes. So it solicits offers. Do you think ANY of those offers would come in anywhere close to the spot price? I believe an offer of that size would come in at least 25-30% above the current spot price.

    Finally, we are hearing of several accounts of large gold buyers going directly to producers and locking in direct purchases for the next year. We don't know what the price is but I can guarantee you that it is at a premium to the spot price.

    That's what is meant.

  14. Top Legal Expert: “President Obama … Says That He Can Kill [Any American Citizen Without Any Charge and] On His Own Discretion. He Can Jail You Indefinitely On His Own Discretion”

    Turley said yesterday on C-Span (starting at 15:50):

    President Obama has just stated a policy that he can have any American citizen killed without any charge, without any review, except his own. If he’s satisfied that you are a terrorist, he says that he can kill you anywhere in the world including in the United States.

    Two of his aides just … reaffirmed they believe that American citizens can be killed on the order of the President anywhere including the United States.

    You’ve now got a president who says that he can kill you on his own discretion. He can jail you indefinitely on his own discretion


    I don’t think the the Framers ever anticipated that [the American people would be so apathetic]. They assumed that people would hold their liberties close, and that they wouldn’t relax …


  15. London Trader - There are Tremendous Silver Shortages

    King World News is receiving reports of significant waits for delivery
    of silver. Today King World News interviewed the “London Trader” to
    get his take on the situation. The source stated, “It is so tight, the
    silver market is so tight that we’ve been waiting three weeks plus,
    before this takedown, for deliveries of size to arrive. I’m talking
    about tonnage orders. This is also key, most of the silver being
    delivered was refined after the orders had been placed, and again,
    that was before the takedown. You can just imagine how long the wait
    times will be going forward.”


  16. I’m Calling for a General Financial Market Strike

    I have received a few emails asking if I was still content with my decision to shut down my brokerage. Not only am I content, but after seeing the news that broke over the weekend, I am of the considered opinion that the entire financial blogging community should formally call for a general financial market strike.And I’m not kidding. A couple of things have happened regarding the MF Global mess that I don’t think got the attention they should have because they broke over the weekend. So let me fill you all in.

    First, all notions of personal property rights were essentially destroyed when the MF Global “trustee” began seizing customers’ gold and silver bullion held in storage if that bullion was purchased through contracts brokered by MF Global. In case you’re not following, let me restate. MF Global customers who traded in precious metals and actually took delivery and OWNED bullion, as in outright, free and clear OWNERSHIP, complete with a warehouse receipt (aka title) with SERIAL NUMBERS designating exactly which physical bars they OWNED, and were PAYING RENT to STORE their own property in a “secure” VAULT, complete with statements indicating that these storage fees were paid in full, are having THEIR PROPERTY THAT THEY OWN AND ARE PAYING RENT TO STORE CONFISCATED by the MF Global trustee in order to feed the gaping maw that is the MF Global “estate”.

    This would be EXACTLY like if you rented a little storage space at one of the thousands of storage facilities that dot this nation, and stored a car there. I used to do exactly this when I had multiple cars. Imagine the owner of the storage facility went bankrupt. Now imagine that a “trustee” SEIZED YOUR CAR, sold it, and used YOUR PROPERTY to feed the storage franchise owner’s BK. Nevermind that you had an explicit RENTAL AGREEMENT and that you had receipts proving that you were paying monthly rent on said storage space, and that you could produce clear title to the car showing that you owned it, and that the VIN numbers matched.


  17. Kansas Crude

    Dave, Holiday Best to you and bonus reading tonight with great feedback. Have been a reader for about a year and its been extremely valuable. Kellogg 85, and yes more than a couple of our Finance profs were Chicago grads you do them proud. Kudos

    You touched upon my biggest blindspot above in the Crimex shuffle. The London trader described the physical thirst across all segments of the globe especially the Chinese/ME for Phyz. It appears logical given the stories circulating about Chinese imports that the forward contracting scenario makes great sense. I monitor several websites and Tulving is good bellweather for me on retail availability and yes supply looks reasonably tight to tight.

    My blindspot is how the settlements on the Crimex are being conducted. I have heard from the Bears to Harvey and others about the $$$ premiums settling, the ponzi EFTs where managed settlement is conducted that just increases the short physical at SLV, GLD. The lack of physical inventory moves at the Comex vaults is beyond baffling to me...but a what prices is all this settlement/contracting occurring? There is so much crap in motion is "best guess" the best we can do? How can at least the first two of these suspected settlement options (+$$$ settlement/ETF) not be verified? Is the loop so tight that no one will verify? What is the degree of confidence on all this? Is the best guess 15%-25%? your best guess is most appreciated. Is there anyway to make some of this more transperant (ok, try not to laugh on the transperancy question)
    +7 year PM investor that tries to stay fully engaged (did I remember to say THANKS)
    Any thoughts on GORO?

  18. Thanks for the feedback KC, I appreciate it. In terms of settlement premiums, the best guess is for sure 15-25%. The reason you don't see as much movement in and out of the vaults as you would think there should be is likely mostly attributable to cash settlement deals and exchange for physicals, which are the settlements using GLD and SLV. We'll never know for sure until we know, and at that point the default event of the Comex will be the least of our problems.

    A couple years ago Jim Willie reported that a well-plugged in source of his confirmed 25% premium cash settlement on the LBMA.

    As for GORO, I have not looked at it in a few years. It had a good run because it was a newsletter darling and www.goldseek.com was pimping it. The last time I looked at it I thought it was overvalued but I don't know what they've done in terms of development and 43-101 revisions since then.

  19. Kansas Crude

    Thanks Dave, Jim Willie is always a must listen. GORO 43-101 is supposed to be out in the next couple of weeks along with a Canadian listing. Interesting development on them paying divvies (option if you choose) now at $.05/month, will be paying in gold and or silver starting soon. Current yield at 2.7% of $22. Estimating annual production exit at end of 2012 at 200,000 GEO. Currently at 100,000. Gotta love those rich poly metallic deposits with by product credits matching production costs. Target 30% of Cash Flow as dividend. You can probably guess I am a fairly recent long. Article on the divvie in PM's


    Again Thanks

  20. goldmoney is good, they deliver the gold on demand and keep it outside the US.
    US Gold Bureau