Gold draws line at $1,300 as shorts close positions

This week gold (COMEX:GCV13) moved firmly above the $1,300 level, which with expiring 1300 call options had been a line in the sand. The weakness on Wednesday and Thursday probably owed something to this option expiration, when the option sellers (mainly bullion banks) had a last-ditch attempt at making these calls worthless.

Last week’s Commitment of Traders report showed that some of the hedge funds have begun closing their shorts, indicating the bear squeeze has begun and is in its early stages. At 11.00 p.m. on Sunday night U.K.-time, the gold price jumped $20 in less than a minute blasting through that $1,300 level, and the rise continued through Monday to $1,348. By way of confirmation of the market’s driving force, open interest on Comex fell 5,291 contracts that day, telling us prices were driven by short-sellers continuing to close their positions.

Meanwhile in London the gold forward rate or GOFO, which I showed in last Friday’s market report, is still negative for 15 business days so far and counting. New evidence confirms the reason behind negative GOFO is a shortage of physical gold for leasing, which ties in with the likelihood that the central banks have reduced their physical supplies to the market.

This week is also noted for a bizarre comment from Ben Bernanke when he told Congress, “No one understands gold prices.” This is odd from the man who heads up the world’s leading central bank. We know he is a Keynesian with a preference for paper currency, and he could have reasonably taken the view that the fall in the gold price is evidence that monetary policy is working and financial fears are receding. Instead something else was troubling him.

My take on it is this: Bernanke must be fully aware of central bank and exchange stability fund interventions in the gold market. The bit that has confused him is that having beaten the market down, physical demand has taken off, absorbing all physical supplied through the Bank of England. In other words he is confused because the carefully laid plans of the mice and men in the central banks have gone badly awry.

In silver there are signs that the bullion banks are sitting on the price hoping to further reduce their short positions. However, Indian demand for gold, thwarted by government restrictions, is fuelling demand for silver, with imports in the first five months of this year rocketing to an estimated 2,400 tonnes. At this pace Indian demand alone will account for nearly all the difference between mine and scrap supply and industrial demand. Good luck to the bullion banks.

Next week

We have a busy week ahead.

Monday. UK Nationwide House Prices, BoE Mortgage Approvals, Consumer Credit, M4 Money Supply, CBI Distributive Trades Survey. US Pending Home Sales. Japan (overnight) Household Spending, Unemployment, Industrial Production.

Tuesday. Spain, GDP. Eurozone Business Climate index, Consumer Economic and Industrial Sentiment. Germany CPI. US S&P Case-Schiller Home Price Index, Consumer Confidence Index.

Wednesday. Eurozone HCIP, Unemployment. US GDP, Chicago PMI, FOMC Fed Funds Rate.

Thursday. Japan Vehicle Sales. Eurozone Manufacturing PMI, ECB Interest Rate. UK BoE Base Rate. US Initial Claims, Construction Spending, ISM Manufacturing, Vehicle Sales.

Friday. Eurozone PPI. US Non-farm Payrolls, Unemployment, Factory Orders.

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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