As students of the gold market know, the paper gold markets in New York and London function as price manipulation mechanisms used by the western Central Banks in their effort to control the price of gold. As the physical demand from the eastern hemisphere pushes the price higher, the operators of the LBMA and Comex print large quantities of paper gold (gold futures, forwards) in order to satisfy the demand of hedge funds, which use futures to chase price momentum (up and down) in gold and silver.
Gold had been trading in a sideways pattern since mid-September between $1320 and $1260:
The graph above is derived from the Comex “continuous contract” end of day price. The continuous contract is not an actual contract. It is rather a price measure that “splices together” the front-month contracts over time for charting purposes.
As you can see, gold has formed a nice uptrend from late December 2016 that seems to have “stalled” since mid-September. I watch the Comex gold futures open interest level and the COT “structure,” where COT structure is the big bank net short position vs the hedge fund net long position, in order to form an opinion on where I think the price of gold is headed. When the open interest in gold futures is at an extreme high level, combined with a bank net short position that is also extremely high, it almost always implies a price-takedown is coming.
Since mid-September, however, the gold futures open interest has stubbornly persisted above 500,000 contracts until the last week. Similarly, the big bank net short and the hedge fund net long positions have persisted at extremes over this time period. This is because, contrary to the “fake news” anti-gold propaganda spewing from U.S. financial media (Bloomberg and reuters specifically), physical “consumption” in the eastern hemisphere (India, China, Russia, Turkey, etc) has been unexpectedly strong. Evidence of this is in direct data that comes from these countries and from the unusually high level of Privately Negotiated and Exchange For Physical transactions occurring on the Comex and the LBMA. These are “off exchange” contract settlement transactions that are intentionally opaque in nature.
Historically, extremes in these metrics tend to correct in much less time than the current period. We have maintained a hedge on our mining stock portfolio for about 80% of the time between mid-September and now. We pulled it off about two weeks ago on a Friday thinking that maybe the ability of the banks to slam the market had diminished this time because of the strong physical demand from the east. Literally about 30 minutes after we took off the hedge the price of gold was slammed (I’m not kidding).
My thinking has been that, if we abide strictly by the COT and open interest, the Comex o/i needs to decline to the low 400k area before the next move higher takes place. When I “eyeballed” the gold chart in early September in the context of historical price-takedown operations, I figured it would take a move down to the $1230-1240 area to wash out enough open interest to rebalance the net short/net long set-up. But the open interest has persisted above 500k and the attacks on the gold price during the paper trading Comex hours have been short-lived in duration and shallow relative to historical intra-day attacks. The banks couldn’t seem to get gold below $1260-$1270 until this week.
My best guess is that the unusually high demand for physical gold from the eastern hemisphere has prevented the banks from taking the price down enough to trigger one last hedge fund open interest wash-out. The 34,896 contract plunge in gold futures open interest last Tuesday (November 28) was the third largest one-day decline in o/i since the beginning of 2011 and it is a move in the right direction in order to break the “log-jam” in open interest on the Comex.
That said, the eastern hemisphere will go into temporary hibernation in mid to late December thru early January. I suspect that one last “shock and awe” price attack orchestrated in the paper market will be attempted in order to get the open interest down into the low 400k area. I thus expect the bull trend in gold/silver will resume in mid-January. We put the hedge back on this week, though we’ve been trying to trade in and out of it on price swings. In all likelihood, unless I see something that suggests otherwise, we’ll likely go through the Christmas/New Year’s period with a hedge.
One last thought, it’s going to be interesting to watch the Bitcoin bulls squirm and panic when the CME banks wrap their tentacles around Bitcoin futures. Contrary to the untested notion that the supply of Bitcoin is capped, the supply of paper Bitcoin (futures contracts) is theoretically infinite…
The commentary above is from IRD’s Mining Stock Journal, which focuses on undiscovered gold and silver junior exploration stock ideas as well as presents relative value trading ideas in mid-cap mining stocks. You learn more about this newsletter here: Mining Stock Journal Information.
I wanted to thank you again for explaining to me how you put a hedge on it has saved me a great deal of money – subscriber feedback received this morning