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.

Hi Ho Silver!

Silver prices went ballistic and has virtually outclassed its commodity peers!

I included the S&P 500 (red) and the emerging market benchmark EEM (blue green) [chart from stockcharts.com]

The parabolic rise of Silver (51% year to date) may give the impression of a bubble at work. Could be, but other commodities have not been emitting the same signals.

Bubbles usually can be identified by across the board ‘rising tide lifts all boats’ increases. The same dynamic can be seen in a ‘flight to real asset’ phenomenon. The difference is with the subsequent outcomes: a boom goes bust while a crackup boom segues into hyperinflation.

The exemplary performance of silver can also due to another fundamental factor: A massive short squeeze!

Writes Alasdair Macleod of Goldmoney, (bold highlights mine)

There are a few banks with large short positions in silver on the US futures market in quantities that simply cannot be covered by physical stock. The outstanding obligations are far larger than the stock available. The lesson from the London Bridge example is that prices in a bear squeeze can go far higher than anyone reasonably thinks possible. The short position in gold is less visible, being mainly in the unallocated accounts of the bullion banks operating in the LBMA market. But it is there nonetheless, and the bullion banks’ obligations to their bullion-unallocated account holders are far greater than the bullion they actually hold.

But there is one vital difference between my example from the property market of 1974 and gold and silver today. The bear who got caught short of London Bridge Securities was right in principal, because LBS went bust shortly afterwards; but in the case of gold and silver, the acceleration of monetary inflation is underwriting rising prices for both metals, making the position of the bears increasingly exposed as time marches on.

No trend goes in a straight line. So silver prices may endure sharp volatilities in the interim.

However, if the short squeeze fundamental narrative is accurate, which will likely be amplified or compounded by the monetary inflation dynamics, then as the fictional TV hero the Lone Ranger would say,

Hi-yo, Silver! Away!

Post Script:

Here is where Warren Buffett made a big mistake.

Berkshire Hathaway reportedly bought 130 million ounces of silver in 1998 at an average of $5.25 per oz. which he subsequently sold at about $7 in 2006. His ideological aversion to metals made him underestimate Silver’s potentials.

Lesson: ideological blind spots can result to huge opportunity costs.