Hey, no one can accuse me of going down without a fight.
I know that there are people out there that think that all "paper" is going to zero. Maybe it is. What the heck do I know? However, can we all agree that, for gold and silver to go to zero, demand for the physical metal has to go to zero, as well? As gold drops through round-number levels, the price-to-zero argument implies that demand must also be dropping because, as well all learned in Econ 101, price is a simple function of supply vs demand. In the end for price to continue declining, demand must remain low or fall even further until it reaches a point where buyers outnumber sellers and price rebounds.
I mention this for two reasons:
- If you truly believe that gold is headed to 1400 or 1200 or 900, then you must also believe that there will not be much demand for physical metal at 1500 or 1300 or 1000. Only an absence of demand can drive price that low.
- If, instead, you believe that global demand for physical metal continues, regardless of price, then you must believe (as do I) that physical demand will, eventually, drive the paper price back higher.
There still seem to be quite a few folks who question and/or don't understand the "massive physical orders below $1600" stuff. Let me state this again for clarity: We're not talking about the Comex here. The "massive physical orders" are in London and are getting filled there, not New York. This is how it has always been and this is how it remains. That the price of paper gold in NY affects the purchase price of physical metal in London is the "futures tail wagging the spot dog" that Ned Naylor-Leyland described last summer.
And herein lies the conundrum for The Bullion Banking Cartel. On the Comex, new spec and managed money is emerging daily to short the gold and silver markets. This money is primarily run by HFT WOPRs which are keying off the lousy charts and other technicals. You must also remember that, post-MFG, there 's virtually no one left in the pit to take the other side of the trade so, when the self-fulfilling short algos pile in, the fall in paper price accelerates. Again, though, Econ 101 teaches us that a falling price almost always leads to greater demand and, in this case, it almost certainly is true.
So, paper price is being driven lower by the spec shorts in New York while Cartel metal inventories are being drained by physical orders in London.
If paper price continues lower, the physical depletion in London accelerates and never forget that every ounce taken out of "the system" decreases the "leveragability" of The Cartel by 100 ounces.
Not only MUST the Cartel adjust their net short position to stem the paper drop, the depletion in physical will greatly impact their ability to add shorts back in when the inevitable rebound occurs. What we are left with is this: The Cartels MUST continue to cover shorts and add longs here in order to halt the price trend which is undoubtedly draining their vaults. Additionally, I suspect that they are losing so much physical metal out the back door that their days of outright manipulation and control of price are ending.
And this short covering and long addition is EXACTLY what we are seeing in the CoT. The latest report, basis last Tuesday, was incredibly bullish and keep in mind...it was dated LAST TUESDAY! Since then, price has fallen another $40 in gold and $1.10 in silver (if you include this morning), so we can safely assume that the CoT structure has only improved. For perspective, consider these stats:
CoT Date Cartel gold net short ratio Cartel total gold longs EE silver net short ratio EE total silver longs
5/8/12 1.94:1 161,037 1.39:1 45,482
2/28/12 2.69:1 145,061 2.32:1 33,802
12/27/11 1.97:1 162,522 1.34:1 41,224
8/30/11 2.23:1 176476 2.41:1 31,944
4/5/11 2.64:1 157327 2.69:1 33,413
Frankly, there's so much information in the little table above that I don't know where to start. Let's simply point out this: For silver, since the EE peak and near signal failure of April 2011, the net short ratio has fallen from 2.69:1 to 1.39:1. This is remarkable and clearly indicative of the trend by the EE to exit their long-held net short position. Ultimately the question is, will they add shorts again on the next rebound, similar to the period of 12/27/11 to 2/28/12? Who knows but with ongoing investigations, lawsuits, trading losses and physical depletion, it would certainly seem to behoove JPM et al to NOT try it again.
Just a little more CoT perspective, from Unlce Ted. The cumulative gold net short position is just 151,400 contracts a/o last Tuesday. This is the lowest since early 2009 when gold was near $900. In silver, the EE net short position is just 17,900 contracts. The only time in the past decade when the EE net short position was at this bullish of an extreme was on the 12/27/11 reporting date noted above. A few more nuggets for Uncle Ted:
- In gold, the 4 main bullion banks covered 12,000 contracts last week alone and their net short position is now just barely above 100,000 contracts. This is the lowest it has been since 2007 and sub-$700 gold.
- Since the latest top on 2/28/12, the Cartel has bought back 100,000 net contracts or 10,000,000 ounces in notional terms. That's $16B in gold!!
- JPM's net silver short position is now around 12,000 contracts and likely lower, given the action of late last week. This means they've essentially cut their own net short position in half since late February.
- The EE having returned their net short position to 12/27 levels means that they sold the equivalent of 150,000,000 ounces on the way up between 12/27 and 2/28 and now they have bought back the entire 150,000,000 ounces on the way down.
So, anyway, what's the point? It's this: Yes, the "price" of gold and silver might go lower still. However, stable/increasing demand at these lower prices is serving to drain the vaults of The Cartels. They are rapidly covering shorts and adding longs in an attempt to stem this tide of declining price and inventory. Eventually, a massive short squeeze will happen. The bottom will be in and price will stabilize at a level higher than where we are currently. The key will then be: What happens next?
- The Cartels resume shorting into the rally and begin to rebuild a massive net short position.
- The Gold Cartel decreases or even abandons their price-capping efforts permanently. In silver, The EE may even go flat or net long. Ted's "raptors" are already net long 16,800 contracts, by the way.
From where will this bottom materialize. Of course, it's impossible to say for sure but I believe we are very, very close. In the end, though, it hardly matters. Just keep stacking. The next phase of this bull market in metal is going to be breathtaking. Be ready.
Have a great day! TF