So, have we turned the corner? Does this rally have legs? There's A LOT going on tonight so I thought I'd better type up this post.
First, though, lets revel in the beautiful bout of short-covering and buying we saw today. Officially, August gold was UP $43.10. That's a one day gain of 3.33359%. Astonishing! Do you know how rare that is?? Perhaps some insomniac or otherwise bored Turdite can research the last time gold saw such a dynamic one day gain.
So, is it over? Has our long, international nightmare finally ended? WAY, WAY TOO EARLY TO SAY. However, this is extremely encouraging.
Let's wait to see what today's OI numbers come in at tomorrow. If this was all short-covering, then you can expect to see the total OI in Comex gold drop significantly. A much more encouraging outcome would be an OI that continues to rise. Note the word "continue". Did you know that total OI for Comex gold bottomed on June 17 at 372,950 and that it has been steadily rising ever since? In fact, as of last Friday, the total OI has grown by nearly 20% to 444,732. This will likely drop off again over the next week as we head into contract expiration but we'll keep an eye on it.
And it's the August expiration that was likely the key today. The total Large and Small Spec gross short position as of last Tuesday was nearly 170,000 contracts and remember, there is no way and no how for Specs to deliver against these positions. Thus, they have to be covered and rolled. Have to. The rally today was almost certainly inspired by a rush to the exits for these shorts. Then you've got the poor suckers that are short the Aug13 calls into Thursday expiration. Anyone who sold short at a strike of $1330 or less got a true religious experience today. Remember, the kneejerk reaction when your short call gets squeezed is to go long a futures contract to hedge yourself. Undoubtedly this happened today, too. The end result is a perfect storm of buying that leads to the nearly unprecedented 3.33% move.
So now comes a "moment of truth". Can this rally sustain itself? Can it do enough technical damage to the bears' case that it becomes sustainable to the upside, thereby discouraging The Specs from executing the "roll" part of the "cover and roll" plan? We shall see.
The price of both metals sits tonight at a crossroads. There are resistance levels and moving averages that are immediately overhead. Can this move continue? Can it break those MAs and further frighten the shorts? Can it bust the trendlines from mid-April and begin a new, positive and UP trend?
The most likely scenario is that the shorts will reassert themselves soon and double down. A forced failure at the resistance and MA points listed above would embolden the shorts to push price back down. IF this happens, it will be important for gold to hold near $1300 and silver to hold near $20.
But my intent is not to convince you that this has to happen. GOFO remains sharply negative and the COMEX vaults are at extreme lows heading into August delivery. Some very sharp minds think that we are at The Beginning of The End of the Comex/LBMA fractional reserve system and their latest columns are reprinted below. Read them and give them your full consideration. You know that I feel very strongly about this, too, but I want to remain a bit more subdued on the causes of today's rally. For now, I'll stick with the analysis laid out above.
First, here's our pal Alasdair at GoldMoney. The entire article is posted at their wonderful site and you can find it here: http://www.goldmoney.com/gold-research/alasdair-macleod/gold-derivative-distortions.html However, you simply must read this so here is a full c&p:
The purpose of this article is to explain how derivatives have distorted gold prices with particular reference to the US futures markets. This will enable us to anticipate the price effect when the distortion is eventually unwound.
When a derivative is created it diverts supply and demand from the underlying commodity. If it is then hedged into the underlying commodity the price effect is the same as if it was a simple commodity transaction. Enter the “honest speculator”, who is neither producer nor consumer, but seeks to profit by trading derivatives for profit, without an intention of taking delivery. The speculator who does not roll his positions into subsequent future contracts brings forward demand or supply only to reverse the price effect later in the life of the contract. In this case speculators provide liquidity with no lasting price distortions.
So far we have considered markets which are essentially free. In the US futures markets, this changed when banks were permitted to act as “commercials”, despite the fact they are in fact speculators in the original market definition. The nature of the futures market changed from this moment to one where speculative positions have become more or less permanent.
In the case of gold and silver the banks have absorbed physical demand by continually running net short positions. We cannot say that all of this demand would have existed without the banks’ intervention; however there is no doubt that the expansion of the overall market by the addition of permanent short positions has led to lower prices overall than would otherwise be the case.
If futures markets are not to distort prices on a prolonged basis three conditions must apply: every player must be motivated only by profit, the banks must commit only their own resources and no one else’s, and there must be periodic liquidation of speculative positions. Instead, there is little doubt that there is political intervention, the banks are too big to fail which allows them to commit funds they would not otherwise commit, and there has been no overall liquidation of speculative positions. The result is that banks have been able to manipulate prices, and pricing has become distorted, confirmed by emigration of gold away from derivative markets.
The third condition cited above needs further explanation. Since March speculative longs have been liquidated through stop-loss orders, leaving a core of longs inaccurately regarded as speculators. The banks have closed their short positions by encouraging new speculators to open short positions, so the speculators are all now on the short side. They don’t realise it yet, but the speculator shorts are the now only true speculators in the market. Therefore when they come to close their positions, there is no one to provide them the necessary market liquidity except on a completely different and higher price basis.
The net effect on the gold price so far has been to suppress it. Demand for physical has increased at lower prices as one would expect, leading to a physical liquidity crisis on US futures markets. At the same time a parallel liquidity crisis has developed on the London Bullion Market, evidenced by negative gold forward rates.
Head of Research, GoldMoney
And now this evening, Santa has joined the fray. He, too, has been all over the GOFO situation and you well know that he has been expecting an end to fractional reserve bullion banking for quite some time. From his site, here's a full c&p of his latest remarks:
My Dear Extended Family,
The cause of today’s spectacular rise in the gold price is the reality that with Friday continues large drops in the Comex warehouse gold inventory. No cogent argument can be formed against the reality that because of the continued fall in gold inventory that within in 90 days or sooner the Comex must change its delivery mechanism.
The highest probability is that Comex will have to move to cash settlement rather than gold. Part of that settlement could be lots of 100,000 GLD that represents the ability to exchange for gold.
Their problem is that if GLD is part of the settlement mechanism for the spot Comex contract that GLD will be destroyed by the convertibility. It is a truism in gold that which is convertible into gold will in fact be converted over time.
Gold rose today because those knowledgeable know the inevitability of the changing of the Comex contract, as it is today which calls for settlement in gold between contracting parties. There is no question this is the emancipation of physical gold from the fraud of no gold, paper gold. The emancipation will cause physical gold exchanges to take birth and to be the discovery mechanism for the price of gold. This is the end of the ability to use paper gold future contracts as a mechanism to make the gold price sing and dance at the will of the manipulators.
With manipulation coming to an end the true value of gold will be discovered by the cash exchanges that are now taking birth. The advent of the cash spot exchanges around the world is the natural demise of the Comex set up as convertible and now being converted.
As long as one can buy spot, pay insurance, transportation and re-casted by Rand Refinery to Asian products sold profitably, the demands for real gold are ending the hay days or even existence of the futures exchanges.
Gold is headed back to be traded as it was before 1973. Gold will trade well above $3500 and those who have lived in the gold market like me for now 53 years know it.
A price of $50,000 for gold is not out of the question as a result of its emancipation from “fraudulent paper, no gold, paper gold.”
GOFO is screaming this truth. The warehouse inventory of every futures gold exchanger is screaming this. The fact that there is no meaningful above ground supply of gold is screaming this. The fact that most of the central banks supply of gold is leased is screaming this. There is no reason why gold cannot move up hundreds of dollars a day when the Comex changes their spot contract settlement, as they must, as they will, very soon.
So here we are. A powerful rally today that has extended into this evening with gold up another $2 as I type at 11:30 pm EDT. Chances are very high that The London Monkeys will go to work on price in a few hours and slam price down $10 or so by sunrise in New York. That's OK and is to be expected. The real key is tomorrow and later this week. Does this rally have legs? Can gold move convincingly through $1340 and silver through $21? We'll see. However, if not now then I'm convinced they will very soon. This has been a powerful rally from a capitulative low on rising open interest. That's a very good start.
I'm going to be out most of Tuesday as I have some personal business to attend to. I'll try to check in from time to time but please try to be nice to one another in my absence. We've come a long way and have built a powerful and well-informed community. Keep the faith. Your patience will soon be rewarded.