Massive Short Covering Prompts for Gold’s Best Day in 11 Months

The precious metals markets have been experiencing extreme volatility. But the pendulum seems to have suddenly shifted towards the bulls

Here is the Reuters: (bold mine)

Gold and silver prices gained nearly 3 percent on Monday after a roller-coaster session that opened with a gut-wrenching dive in silver to its lowest in 2-1/2 years before an abrupt midday turnaround.

After trading lower through most of the day, gold suddenly lurched more than $10 an ounce higher around noon U.S. time, with traders citing a wave of pent-up short-covering after seven consecutive days of losses. Also, COMEX silver futures had plunged more than 9 percent after a big sell order at the open, triggering technical buy signals, they said.

Yet this is one of the very scanty reports that covered gold’s fantastic one-day bounce. 

It looks like most media, whom has been preaching of "the end of the gold bubble" meme, went into a blackout with gold’s single day comeback. 

I know, this may be a short-term dead cat's bounce.

The chart from the Zero Hedge reveals of the massive intraday swing from a test of the mid-April low to the 3% gain which accounted for as gold’s best day in 11 months

It is interesting to note that gold’s bounce comes amidst a RECORD pile up of Wall Street shorts;

Here is the Bloomberg: (bold mine)

The funds and other large speculators held 74,432 so-called short contracts on May 14, U.S. Commodity Futures Trading Commission data show. That’s the highest since the data begins in June 2006 and compares with 67,374 a week earlier. The net-long position dropped 20 percent to 39,216 futures and options, the lowest since July 2007. Net-bullish wagers across 18 U.S.- traded raw materials rose 1.1 percent to 588,482, led by gains in hogs, corn and cotton.

And this also comes amidst the escalating divergence between the supposedly larger physical markets, but which Wall Street has overpowered through the use of massive leveraged derivatives

More from Bloomberg:

Gold premiums in India, the world’s biggest buyer, more than doubled to $40 an ounce May 15 from $17 to $18 a day earlier, according to Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation. China’s bullion demand jumped to a record 294.3 tons in the first quarter, the World Gold Council said in a report May 16.

India's remarkable doubling of the premium in just a few days has partly been due to the Indian government's stepped up war on gold. 

Nonetheless skyrocketing premiums in the physical markets signifies as the accelerating imbalances between very strong demand and an enfeeble supply coming from reluctant sellers (gold prices are determined by reservation price model and not by consumption)

Here is what makes things interesting; what has prompted for the “wave of pent-up short-covering” in the light of the record position of Wall Street shorts, even as Wall Street’s gold inventories has been rapidly depleting?

While the mainstream attributes the rally to superficial "seen" or "rationalized" factors--such as yesterday’s "reversal of the strength in the US dollar" or "weaker stock markets" or “crowded trade”, could it be that increasing demand for physical deliveries from Wall Street serve as the “unseen” or “invisible” factor?

If the latter holds sway, then the current concerted acts of gold suppression by Wall Street-goverment cabal may be losing its energy.

Things are getting to be more and more interesting.

Cash Hoarding No Security Against Confiscation, UK’s Panic Buying of Physical Gold

A gold bear analyst recently commented that the confiscation of bank deposits particularly in Cyprus represents a bearish factor for gold. The reasoning goes that deposit confiscation will motivate people to pull money out of the banking system and hold onto cash by storing them in pillow mattresses rather than own gold, because gold is subject to seizures.

Well lucky for the bloke that gold prices fell in his direction.

But such logic doesn’t stand on firm grounds. While gold is also subject to confiscations, hoarding cash does not secure one’s savings or purchasing power from government's predation.

Governments around the world has embarked on the trend to ban cash or to limit cash transactions. Such has been the case of Russia, Mexico, Italy, Spain, Louisiana in the US,  Greece and elsewhere. Scotland proposes to restrict use of cash on scrap metal sales, while Sweden’s anti-cash programs promoted by banksters have been stonewalled by the public.  

A few years back, I had a personal nightmare with Philippine airport authorities, who initially threatened confiscation of my excess cash holdings due to arbitrary Anti Money regulations that I have not been aware of.

And this is partly why people have sought alternative currencies such as the use of Tide detergent (in the US) or of Bitcoins.

As a side note, bitcoins after the recent crash, which ironically had been coincidental with gold’s flash crash, has began to show signs of recovery also along with gold prices.

In addition, governments confiscation of people’s savings are being done directly (deposits) and indirectly (inflation), so cash holdings provide no better safehaven alternative to gold. Both are subject to legal forfeitures but at least gold can preserve the purchasing power from growing aggressiveness by central banks to resort to the paper money solution. Central bankers have now been revered by media as superheroes. Move aside Iron Man and the Avengers, here comes Bernanke, Draghi, Kuroda, Carney, Tetangco and their ilk to save the world.

Yet events in UK has also been proving the opposite of such theory as the UK's physical gold market reveals of the same panic buying spree as elsewhere.

From Bloomberg: (bold mine)

Britain’s Royal Mint, established in the 13th century, sold more than three times more gold coins this month than a year earlier as prices declined.

Sales are more than 150 percent higher than last month, according to Shane Bissett, director of bullion and commemorative coin at the Royal Mint. Gold is down 11 percent this month, heading for the biggest drop since September 2011.

Gold markets operates in a distinct market relative to other commodity markets. Demand is hardly driven by consumption but by demand due to gold’s quasi money properties (store of value) or as seen by mainstream as “investment” and or from speculative functions or particularly reservation price model or from reservation demand.

Hence when media reports that physical gold inventories have been strained, then this means that much of the current cumulative physical gold holders, which consist of all gold that had ever been mined since history (171,300 tonnes), simply have resisted selling, since they don’t see current price levels as adequate.

Alternatively this means that when the physical markets have seen tight inventory pressures, which means that the current mining output can’t service (close to 2,500 tonnes annual), aside from where most current gold owners have resisted the temptations to sell, then much of the selling may have come from elsewhere.  They may come from stealth central bank selling via bullion banks or from Wall Street’s paper gold. Central banks own 19% of all above ground gold

In short actions in the physical "non-political individual" markets have been exposing on the attempts to manipulate the gold markets via bear raids using "Wall Street-government" paper gold.

The physical markets also reveals that gold hasn’t lost its luster as insurance and as safehaven alternative in the quest for the preservation of the purchasing power by the non-political public.

Oil Markets: Inflation is Dead, Long Live Inflation

There seems to be an ongoing dissonance in the oil or energy markets.

Bespoke Invest shows us that crude oil inventories “are now at their highest levels of the year”, while distillates and gasoline “both saw larger than expected draws in their stockpiles”.

Yet crude oil prices are approaching the April highs.

And as mentioned above it isn’t just crude oil, such dissonance is likewise extended to the gasoline markets (Gaso).

The obvious answer is that the recent actions don’t just reflect on the consumption pricing model but from the reservation pricing model.

As we previously pointed out, commodities are not just meant to be consumed (real fundamentals) but also meant to be stored (reservation demand) if the public sees the need for a monetary safehaven.

Thus, we seem to seeing inflation dynamics incrementally playing out in the commodity markets.

Meanwhile, there has also been a small recent pop in the natural gas market (NATGAS).

I’d be convinced of the deepening risks of the inflation cycle, when Natural Gas chimes in. So far, this hasn’t been so.

Yet the odd part is that mainstream says inflation hardly exist. I wonder what kind of world they seem to be living in.

What Gold’s Latest Record Prices Mean

``The struggle against gold which is one of the main concerns of all contemporary governments must not be looked upon as an isolated phenomenon. It is but one item in the gigantic process of destruction which is the mark of our time. People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty.” Ludwig von Mises

A major trait of bullmarket is, whatever assets we sell today will climb higher tomorrow. This implies that the most regrettable course of action in a bullmarket is to sell.

And one great example would be the gold market. Gold just set a new record in terms of nominal high (see figure 1).

Figure 1: Netdania.com[1]: Gold’s Stairway To Heaven

The monthly chart reveals that gold prices have been in a bullmarket since 2000. While true enough, there have long periods of consolidation, the general trend over the last decade has been up.

And importantly, contrary to those who allege that gold functions as safehaven during recessions or during the “deflation-symptom” crisis similar to the Bear Stearns-Lehman episode of 2008, evidence has shown otherwise—gold fell during the previous two recessions of 2001 and 2008 (see black channel lines)!

Alternatively, the most recent record run only implies that the fresh milestone high, established last week, DOES NOT presage of any forthcoming market crashes or “double dip” recessions. And if gold serves as a lead indicator as previously discussed[2], then the likelihood is to see reanimated activities in global risk markets.

At the start of the year, we were told that gold wouldn’t generate investor appetite as the menace of “deflation” continues to lurk around the corner. We even read predictions stating that gold would fall back to the $800 levels[3] way until last month[4].

However, as we have always been saying--in a world of central banking, deflation is no more than a bogeyman to rationalize more inflationism, which central bankers are likely to accommodate. After all, inflation is ALL about politics. And central bankers, in spite of their supposed “independent” role, have been the main conduits in financing government expenditures. Thus all talks of “independence” are mostly demagoguery. Fact is, global banking regulations, as the Basel Accords, have all been skewed to accommodate government expenditures[5].

Of course, one major bullish factor about gold is that mainstream STILL doesn’t get it; gold isn’t just an inflation hedge, nor is it about alternative assets[6]. It’s also been starkly misguided to impute ‘conventional’ financial valuation metrics to gold when this doesn’t apply. It’s even myopic to calculate or value gold prices premised on commodity usage. And it is also faulty to appraise gold based on global mining output. Since gold isn’t being consumed, incremental additions to the above ground supplies by existing mines hardly determine the pricing model (see previous discussion[7]).

In a decadent world of fiat money, where money printing to fulfil specific political agenda have been the most convenient route resorted to by political leaders everywhere-for the simple reason that the ignorant masses hardly understands how such surreptitious redistributive activities influences their lives- gold seems to be re-establishing its role as ‘money’.

Therefore, gold’s ascendant trend in ALL currencies have simply been manifestations that demand for gold has been transforming from mere “commodity” (jewelry and industrial usage) to “money”.

Gold is being held as reserve asset not just by the central bank, but importantly by the general public. Gold’s increased function as “reservation demand” is what usually the mainstream sees as “speculation” or “speculative hoarding” or “investment demand”.

Otherwise said, money’s “store of value” is increasingly being factored into gold prices (unit of account). Hence, relative to gold pricing, this implies that reservation dynamics or the reservation model (and not consumption model) determines gold valuations or that the exchange ratio or monetary valuations relative to fiat currency applies-- where valuations are determined by the expected changes in relationship between the relative quantity of, and the demand for, gold as money vis-a-vis paper currencies.

And possibly one day, such transformation would include the deepening of “exchange demand” or gold as ‘medium of exchange’ (see previous discussion[8]). Proof of this has been the emergence of Gold ATMs in Germany[9] and in Abu Dhabi[10].

All these, of course, are ultimately dependent on the stimulus-response and action-reaction of global political leaders on the swiftly evolving political, economic and financial sphere.

And thus, periods of weaknesses, whether from recessions or from consolidations (in technical or chart lingo the “energy fields”), has served as buying windows rather than selling opportunities.

Yet for those whom have remained sceptical and or earnestly drudge to market “timing” gold’s prices, they usually end up chasing gold prices higher-- buy high and sell low.

And this is especially brutal to those in constant denial of gold’s ascendancy; they have entirely missed out the rally for ideological reasons, and vent their frustrations by continually disparaging such developments. The odd thing is that this has already been a 10-year market process.

Yet since gold rise has been threefold, all errant attempts to “time” the market has resulted to lost or missed profit opportunities.

As the legendary trader Jesse Livermore expressed by Edwin Lefevre in the classic must read for any serious investors, “Reminiscences of a Stock Operator”,

``Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks.[11]”

In short, the best returns emanate from long term investments.

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[1] Netdania.com, Forex charts

[2] See Why The Current Market Volatility Does Not Imply A Repeat Of 2008

[3] Yahoo. Finance, Gold Is "Fairly Expensive," Could Fall to $800 If Fed Moves, Midas Fund Manager Says, January 22, 2010

[4] CNN.Money, The coming gold bust

[5] See The Myth Of Risk Free Government Bonds

[6] Reuters.com, US gold sets record, ends strong as alternate asset

[7] See Gold As Our Seasonal Barometer

[8] See Financialization of Commodities: Boon Or Bane?

[9] See Creative Destruction: Electronic Payments Over Cash And Checks

[10] Financial Times Blog, Abu Dhabi’s gold ATM machine a sign of more opulence to come, May 13 2010

[11] Lefevre, Edwin, Reminiscences of a Stock Operator p.76 John Wiley and Sons

Gold As Our Seasonal Barometer

``If our present inflation, as seems likely, continues and accelerates, and if the future purchasing power of the paper dollar becomes less and less predictable, it also seems probable that gold will be more and more widely used as a medium of exchange. If this happens, there will then arise a dual system of prices — prices expressed in paper dollars and prices expressed in a weight of gold. And the latter may finally supplant the former. This will be all the more likely if private individuals or banks are legally allowed to mint gold coins and to issue gold certificates.” Henry Hazlitt (1894–1993) Gold versus Fractional Reserves

I wouldn’t be in denial that seasonal factors could weigh on asset pricing as we mentioned last week.

This Ain’t 2008

But many analysts seem to have taken a rear view mirror (anchoring) of the seasonal factors on the possible performances of the global stock markets.

Given the fresh traumatic experience from the 2008 meltdown, it is understandable that many have written words of caution about navigating the turbulent periods of September and October.

But unless we are going to see another seizure in the banking system, the 2008 episode seems unlikely to be the appropriate model.

True, we could see some heightened volatility, as a result of the variable fluxes in inflation (as in the recent case of China).

But for us, the focus should be on how the US dollar index would be responding to the stickiness of inflation on the financial markets in the current environment, instead of one dimensionally looking at the stock markets vis-à-vis the seasonal forces.

In my view, gold’s strong performance during this period could be a fitting a precursor see figure 3.

Figure 3: Uncommon Wisdom/Sean Brodrick: Entering Gold’s Seasonal Strengths

If gold functions its traditional role as the archrival or nemesis to paper money, then simplistically a weaker dollar should translate to higher gold prices.

In Four Reasons Why ‘Fear’ In Gold Prices Is A Fallacy we pointed out that one of the major reasons why the mainstream has been wrong in attributing “fear” in gold prices was because of the massive distortions by governments in almost every market.

Hence, gold or the oil markets, which represents as the major benchmarks to commodity indices, hasn’t been on free markets to reflect on pricing efficiency enough to attribute fear.

Instead, over the short term, government interventions working through different channels such as the signaling, an example would be the previous announcements of IMF gold sales [which eventually got discounted], or other forms of direct or indirect manipulation, has been used as a stick to control gold prices.

This, plus the seasonal weakness has indeed brought gold prices to a tight trading range, instead of collapse as predicted by the mainstream, thereby validating our thesis and utterly disproving the “fear” thesis.

Nevertheless, governments appear to have retreated from selling their reserves under the Central Bank Gold agreement which expires on September. Central Bank’s selling during the first 6 months of the year are down 73% at 39 tonnes (commodityonline). Although as the calendar year closes, central bank selling could step up, but this would likely be met by the seasonal strength and won’

Investment Taking Over Traditional Demand

Also, as we also pointed out in February’s Do Governments View Rising Gold Prices As An Ally Against Deflation?, the dynamics of gold pricing has rightly been changing.

Then we said, ``The implication of which is a shift in the public’s outlook of gold as merely a “commodity” (jewelry, and industrial usage) towards gold’s restitution as “store of value” function or as “money”. The greater the investment demand, the stronger the bullmarket for gold.” (see Figure 4)

Figure 4: World Gold Council: Investment Leads Gold Demand

It would seem like another vindication for us, this from the Financial Times, (bold emphasis ours)

``Total identifiable gold demand, at 719.5 tonnes in the second quarter, was down 8.6 per cent compared with same period in 2008, with jewellery consumption down 22 per cent to 404.1 tonnes.

``Investment demand, which includes buying of bars and coins as well as inflows into exchange-traded funds, reached 222.4 tonnes in the second quarter, a rise of 46.4 per cent from the same period a year ago.

``However, the second quarter was the weakest three-month period for investment demand since before the implosion of Lehman Brothers in September 2008…

``Mr Shishmanian [Aram Shishmanian, chief executive of the World Gold Council-my comment] said that although total demand had failed to match the exceptional levels seen when the economic and financial crisis was at its peak, investment demand had enjoyed a strong quarter, underlining a growing recognition of gold as an important and independent asset class.”

In short, yes, investment demand has materially been taking over the dominant role in gold demand over jewelry and industry and will continue to do so as global central banks inflate the system.

China’s Role And The Reservation Price Model

Moreover, China’s government recently loosened up on its investment rules for gold and silver and even encourages the public to participate [see China Opens Silver Bullion For Investment To Public].

On a gold [in ounces] per capita basis, China has only .028 ounces of gold for every citizen, against the US which has .9436 ounces of gold in its reserves for every Americans (Gold World). That’s alot of gold for the Chinese with its huge savings and humongous foreign currency reserves to buy. And that’s equally alot of room for gold prices to move up.

This means that if the inflation process will continue to be reflected on the financial asset prices, then the likelihood is that gold will pick up much steam going to the yearend on deepening investment demand from global investors, perhaps more from Asia and augmented by the seasonal strength.

Moreover, gold will likely serve as a better barometer for the liquidity driven stock markets, in spite intermittent volatility, than from traditional seasonal forces.

Finally, Mises Institute’s Robert Blumen gives a good account of why evaluating the price dynamics of gold shouldn’t be from the conventional consumption model but from reservation prices model.

Since gold prices are not consumed by destruction and where above ground supply remains after being processed or used, the ``owners of the existing stocks own much more of the commodity than the producers bring to market.”

Hence to quote Mr. Blumen, ``The offered price of each ounce is distinct from that of each other ounce, because each gold owner has a minimum selling price, or "reservation price," for each one of their ounces. The demand for gold comes from holders of fiat money who demand gold by offering some quantity of money for it. In the same way that every ounce of gold is for sale at some price, every dollar would be sold if a sufficient volume of goods were offered in exchange.”

Read the rest here.