Gold sees bullion banks go long

The vested interest for lower gold prices lies squarely with the four major central banks, which are most probably going to accelerate quantitative easing. Japan is already doing so, the Fed is backing off earlier suggestions they will slow down, the ECB has a developing euro-area slump, and the Governor-designate for the BoE this week was quoted as applauding Japan’s “bold policy experiment.”

Suppressing gold prices is central to retaining monetary credibility in these extraordinary times. However, there are important geo-political implications.

Next week

A quiet start announcement-wise, warming up on Thursday and Friday.

Monday. Nothing important.

Tuesday. UK’s Nationwide House Prices. US Case-Schiller Home Price, Consumer Confidence. Japan (overnight) Retail Sales.

Wednesday. Eurozone M3 money supply. UK CBI Distributive Trades.

Thursday. Eurozone Business Climate Index, Consumer Sentiment, Economic Sentiment and Industrial Sentiment. US Preliminary GDP and GDP Deflator, Initial Claims, Pending Home Sales. Japan (overnight) Core CPI, Real Household Spending, Unemployment and Industrial Production.

Friday. Japan Construction Orders and Housing Starts. UK BoE Mortgage Approvals, Net Consumer Credit, Secured lending, BSA Mortgage Statistics, and BoE M4 Money Supply. Eurozone HCIP and Unemployment. US Core PCE Price Index, Personal Income, Personal Spending and Chicago PMI.

It has been an interesting week for gold. On Tuesday, open interest on Comex fell sharply by 6,961 contracts. The action was in the June contract, which fell 12,072, only 3,000 of which appear to have been rolled into the next active month (August). The bulk of the fall in the June number must have been from bears closing their shorts ahead of Ben Bernanke’s testimony to Congress on Wednesday, but we can see from the numbers that the big bullion banks did not supply the stock (see below).

In the wake of his testimony and the release of the FOMC minutes, there was huge volatility in all markets, including a 7% crash in Japanese equities. The trading range for gold was more than $60, as first the bears took fright over Bernanke’s reaffirmation of money-printing policies, when gold rose nearly $30 in ten minutes in a classic bear squeeze with the bullion banks refusing to supply the stock. The market was then driven sharply lower, probably assisted by official intervention lest people get the idea that gold is better than dollars.

The net position of the four largest traders, which we can assume are all bullion banks, on May 14 was long for the first time for as long as records are available, shown in the chart below.

A1

Keep in mind the fundamental difference between precious metals and other financial markets: The former are seriously oversold and the latter seriously overbought. Logic strongly suggests that retreats from these extremes would drive gold and silver up, and equity and bond markets down. Therefore, the action in gold and silver was perverse. The evidence is in the chart below, showing how extreme the hedge fund (managed money) short positions in gold have already become.

A2

Factor in the severe shortage of physical bullion and the conditions for an explosive move to the upside become apparent. This is why the market-making bullion banks would be stupid to close their hard-won net long position, and they know it.

The vested interest for lower gold prices lies squarely with the four major central banks, which are most probably going to accelerate quantitative easing. Japan is already doing so, the Fed is backing off earlier suggestions they will slow down, the ECB has a developing euro-area slump, and the Governor-designate for the BoE this week was quoted as applauding Japan’s “bold policy experiment.”

Suppressing gold prices is central to retaining monetary credibility in these extraordinary times. However, there are important geo-political implications.

Next week

A quiet start announcement-wise, warming up on Thursday and Friday.

Monday. Nothing important.

Tuesday. UK’s Nationwide House Prices. US Case-Schiller Home Price, Consumer Confidence. Japan (overnight) Retail Sales.

Wednesday. Eurozone M3 money supply. UK CBI Distributive Trades.

Thursday. Eurozone Business Climate Index, Consumer Sentiment, Economic Sentiment and Industrial Sentiment. US Preliminary GDP and GDP Deflator, Initial Claims, Pending Home Sales. Japan (overnight) Core CPI, Real Household Spending, Unemployment and Industrial Production.

Friday. Japan Construction Orders and Housing Starts. UK BoE Mortgage Approvals, Net Consumer Credit, Secured lending, BSA Mortgage Statistics, and BoE M4 Money Supply. Eurozone HCIP and Unemployment. US Core PCE Price Index, Personal Income, Personal Spending and Chicago PMI.

 

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About the Author
Alasdair Macleod

Alasdair Macleod is head of research for GoldMoney. He also runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. He has a background as a stockbroker, banker and economist. He can be contacted at Alasdair.Macleod@GMYF.org and followed on Twitter @MacleodFinance.

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