Total Gold Open Interest Falls Below 400,000
I don't know. Maybe you think I'm crazy for harping on this so much. But, I'm here to tell ya, this is a big deal. I can't remember the last time the total gold open interest on the Comex was under 400,000! And now here, in 2012 with price at $1650 and interest/attention in gold at an alltime high, total gold OI as of last Thursday evening is 399,607. This is astounding and it has significant implications.
Once again, perhaps I need to give you some perspective. In November of 2009, with price near $1200, total OI was 510,744. In September of 2010, with price near $1400, total OI was 585,564. In July of last year, before The Cartel got caught in an S&P downgrade-induced short squeeze, price was near $1600 and total OI was 542,342. Lastly, just six short weeks ago, the gold price was near $1800 and total OI was 479,044. Even at late February levels, gold OI was down 20% from the peak in 2010 but still 20% above where we were as of Thursday night. This is breathtaking, startling, amazing and...confusing.
How could this be? Is not fiat devaluation awareness higher than it was in 2010? Is not gold investment demand higher than it was in 2010? Is not physical demand greater than it was in 2010? If so, then how in heck can total gold open interest on the Comex be down 30-35% in 18 months?
Well, there are certainly myriad reasons for this. A big one is that initial and maintenance margins are significantly higher now than 2010. However, there's no way that higher margins can explain a 30% drop in market size. Lots of miners have eliminated forward hedging programs, too, but this can't account for all of the drop, either. And the MFG collapse has chased away a lot of participants whose compliance and legal departments no longer allow dealings with the Comex. Now...you put those three together and...maybe we're getting somewhere.
But what does this ultimately mean? It means, as I've stated here consistently since November, that the Comex is dying and losing its ability to "wag the dog". In order for the price of paper metal to have any influence on the price of physical, a balance must be struck that keeps the price of paper roughly in line with the demand for physical. As paper price drops, physical demand increases and paper price must then respond higher. If paper price were to continue to fall in the face of increasing physical demand, the resultant undervaluation would bring about a "run". And, for the C/C/C (CME/Comex/Cartel) with paper levered up to 100:1 basis the gold in the vaults, a "run" must be avoided at all costs.
Therefore, though TPTB would love to see gold at 1400, or at 1200, or at 1000, it's not going to happen. It can't and won't. Price must be kept in a sort of equilibrium where physical demand roughly equals supply. Hmmmm. In an environment where price is "managed" in order to maintain this equilibrium, do you think a long-term chart might look something like this:
Anyway, I guess my point is this: Interest in "investing" through the Comex is at extraordinarily low levels. If The Cartel and the specs in tandem keep shorting and pushing it lower, price may drop to levels where paper price effectively separates from physical price and this cannot be allowed to happen. What this means to you is this: Prepare for a spring and summer rally in gold. The criminal C/C/C must make gold go up in order to continue the continuum or, stated differently, maintain the status quo. The only way that gold can be allowed lower would be if the C/C/C can somehow rig global physical demand lower at the same time. If you actually think they can do that (dissuade central banks, institutions and individuals from wanting physical gold reserves), then you should expect lower prices from here. If, on the other hand, you believe that physical demand will continue to increase through the balance of 2012 and for years to come, then you must be prepared for a price recovery that will last into the summer.
Below are some charts to chew on overnight and into Tuesday. Note that gold was actively held below $1650 all day today. (The BLSBS was so lousy on Friday that we undoubtedly added some new spec longs today. We also added so new Cartel shorts today with the $1650 cap. Therefore, look for total OI to be back over 400,000 when it's reported tomorrow.) In the big picture, however, gold is still looking like it's crafting a massive, 8-month reverse head-and-shoulder bottom, which would be extremely bullish. Also note that gold is still above the old downtrend line from the 8/2011 and 11/2011 highs and remember that prices, once they break downtrend lines, often "ride" them lower while consolidating before finally breaking higher once and for all.
Silver is stuck, for now, in an EE-inspired range that is roughly bound by $33 on the top and $31 on the bottom. Like gold, however, silver is slowly carving out a massive, reverse head-and-shoulder bottom in the "correction" since last September.
Finally, thanks to all who have taken up Andy on his offer and conscripted themselves into the Turdville Army. Beginning Tuesday, we will be sending two, full platoons into battle against the Evil Empire. Good luck and Godspeed, loyal Turdites. Go extract a pound of flesh and a few pounds of profit. Then, report back here in 3 weeks with your success stories so that we might further enlist and grow our force.