gata's take on the gold move

  1. 374 Posts.
    EXCERPTS FROM 'MIDAS' COMMENTARY
    FOR THURSDAY, JANUARY 16, 2003
    COURTESY OF LEMETROPOLECAFE.COM


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    The Gold Derivatives Neutron Bomb



    By BILL MURPHY


    Gold $357.80, up $7
    Silver $4.81, up 6 cents


    "All the perplexities, confusion, and
    distress in America rise ... from downright
    ignorance of the nature of coin, credit,
    and circulation."


    -- John Adams in a letter to Thomas
    Jefferson, 1787


    Adams must have been referring to the Gold
    Cartel, Gold Fields Mineral Services, the
    World Gold Council, and most gold analysts.


    The past two days I checked around and
    couldn't find one gold fund manager who
    wasn't looking for a sharp break in the gold
    price. Not one! How bullish is that? Which is
    what I have tried to convey to the Cafe
    membership recently.


    Never have I seen such rubbish from market
    analysts as what the commentators and bullion
    dealers have written about gold the past many
    weeks. There is almost zero understanding of
    the gold market out there. Bob Pisani of CNBC
    insinuated today that gold's move up was due
    to a bunch of know-nothing, emotional-wreck
    small speculators. That is worse than
    pitiful.


    Today's sharp move higher is the biggest one
    in memory on a closing basis. And yes, we
    have another GATA coincidence.


    It seems that every time GATA pops off about
    the real gold story, gold bolts to the
    upside.


    It happened GATA's African Gold Summit in
    Durban, South Africa, on May 10, 2001.


    It happened when Reg Howe and I spoke at the
    Mining Analysts Association's seminar in
    London on May 23 last year.


    It happened right after the report by Howe
    and Mike Bolser, documenting the 15,000-tonne
    central bank short position in gold, was
    released on December 4.


    And it happened today, 12 hours after GATA
    disclosed that Portugal's central bank had
    lost most of its gold.


    Coincidences all!


    Somebody is paying attention to what GATA has
    to say.


    Today's gold action was classic. Morgan
    Stanley turned aggressive buyer right after
    the opening, taking on the other bullion
    banks. They kept at it and gold remained
    firmly higher all morning, creeping
    up to the critical $354.50 gold price. Then,
    out of the blue and late in the trading
    session, Goldman Sachs turned aggressive
    buyer, taking gold up sharply on the day.


    Over and over again these past weeks I have
    been reporting Goldman on the buy side, not
    the sell side. What we don't know is who they
    are buying is for.


    But for Morgan Stanley and Goldman Sachs to
    be the featured buyers on a dramatic up day
    for gold is very significant. It is an
    indication that the rats are leaving the
    gold-rigging ship. "Every man for himself"
    must be the new deal.


    Word is circulating in the bullion dealer
    world:


    * The central banks have written more gold
    calls than they have gold to deliver. Good
    grief!


    * Aussie gold hedgers are getting hit with
    knock-in calls. Some say their exposure is
    160 percent of their mine life. Good grief!


    * Barrick is grousing that they are going to
    accelerate their hedge covering. Good grief!


    How quaint! What do you think is going to
    happen when those major forces all try to
    cover at the same time?


    It is called the Gold Derivatives Neutron
    Bomb. It goes off.


    There is no way that players of that size can
    cover without driving the price of gold way
    up. You can't cover massive positions like
    that in a market that has a huge monthly
    supply/demand deficit and little gold supply
    around.


    That is very bullish news in the aggregate.
    Perhaps the Morgan Stanley and Goldman Sachs
    buying is for the central banks, Aussie gold
    producers, and Barrick. If it is, they have a
    long way to go.


    But it is amazing. I am hearing that veteran
    traders still want to go short gold, not go
    long. If the paid attention to GATA, they
    wouldn't dream of it.


    GATA stretcher-bearer: Prepare for active
    duty, please. Gold has cleared all resistance
    and will now head for $419 per ounce.


    Today's close is particularly bullish because
    gold consolidated for three weeks in the low-
    $350 area. All those sellers are losers at
    the moment. The close also tells traders that
    the Gold Cartel has lost control of their
    fraudulent manipulation. All they can do now
    is rear-guard action to slow down the price
    advance as best they can.


    That means we are very close to that
    Commercial Signal Failure I keep referring
    to. The trapped commercial shorts (the Gold
    Cartel and others) are going to have to give
    up the ghost soon, which will lead to a
    short-covering buying panic. There are no
    gaps to fill in this gold market. That is
    very bullish, as we still have the breakaway
    gap ahead of us.


    The gold news is bullish all the way around:


    * The dollar closed in new low ground by a
    good margin. March closed at 101.12, down
    .57.


    * The CRB closed in new high ground at 241.58
    with oil rising to $33.66 per barrel.


    * Iraq war news heated up as chemical
    containers were found.


    * The stock market is starting to roll over.


    What a beauty of a gold chart:


    http://futures.tradingcharts.com/chart/GD/23


    If gold holds today's gains, it will give us
    the seventh higher weekly close in a row.
    Markets seldom do that. That tells you how
    bullish gold is. That kind of action is
    setting up an upside move of epic
    proportions. Those moves occur when few
    people understand the fundamental dynamics
    that are moving the market (early in the
    move). That is the case with gold.


    The gold world refuses to tell the gold
    truth. How many investors out there know the
    GATA story and all we have distributed about
    gold? How many realize that the price was
    suppressed for years? How many know about the
    15,000-tonne short position? Very few.
    Someday they will know that story. Gold will
    be $450 to $550 bid by then. Your gain, other
    investors' loss.


    Silver has put in a triple top at $4.885,
    basis March. If it takes that resistance
    point out, look out above. I still expect
    silver to run up $1 one trading day in the
    near future.


    * * *


    The John Brimelow Report
    Thursday, January 16, 2003


    Indian ex-duty premiums: AM $1.17, PM $1.86,
    with world gold at $351 and $350.50. Below
    legal import point -- the latter by only 30
    cents or so. HSBC's daily report, courtesy of
    Ross Norman's site:


    http://www.thebulliondesk.com


    helpfully notes:


    "Further support was evident from the Indian
    subcontinent, with HSBC traders reporting
    typical price-dip trade during New York
    market hours" -- in other words, when gold
    dipped below $350 in the early New York day.


    Japan lent a little more passive support
    today, $US gold being virtually static (-5c)
    on 6.6 percent higher TOCOM volume equivalent
    to 21,438 Comex lots. Open interest edged up
    the equivalent of 837 Comex contracts. In
    view of the steadily firm yen, and in the
    face of a lower New York price last night
    this was a fair performance.


    Yesterday New York was estimated to have
    traded 62,000 contracts.


    Although the wire services all parrot the
    line that yesterday's softness was all long
    liquidation, the opening in fact was
    obviously a bear raid:


    "Selling from Europe was executed prior to
    the New York open, which saw market-on-open
    fund selling, one broker selling nearly 1,000
    lots of February futures.Sellers from the
    previous New York close appeared to pick up
    further interest and were aggressive sellers
    on the move through $350 yesterday." --
    Investec.


    "New York opened actively with aggressive
    investment bank selling on the COMEX driving
    the price below $349 amid rumors of sell
    stops located below $348 and $345. Good
    buying from the physical sector stemmed the
    decline and the market quickly reversed
    direction." -- Standard London.


    The point is that gold's eerie refusal to
    obey the screamings of technically oriented
    observers that it should slump is in defiance
    of considerable active pressure to do so. The
    bears have a serious problem.


    Hard-working active equity managers might
    appreciate my brother's CBSMarketWatch attack
    on Burton Malkiel, who for 30 years has been
    dodging evidence that his "Random Walk"
    hypothesis is fallacious. For gold's friends
    the story is especially relevant, as not only
    has the Vanguard Group bent the rules to keep
    Malkiel on its board after evicting industry
    titan Jack Bogle, but it also peremptorily
    closed their large gold fund to new investors
    early last year, implying that gold shares
    were unsuitable for their clients.


    Immediately after I sent out my comments
    today, Reuters reported that open interest
    rose 975 contracts yesterday on 57,199 lots.
    Probably short sellers outweighed liquidating
    longs. On the other hand, MarketVane's
    Bullish Consensus for gold fell two points,
    to 86 percent.


    The onus of proof is on the bears.


    -- JB


    * * *


    Yesterday I did my best to trash the
    clueless gold analysts. Today it is time to
    focus on the people who are supposed to know
    that gold market better than anyone else:
    Gold Fields Mineral Services.


    At the 2000 Financial Times gold conference
    in Paris, I stood up in the middle of the
    Q&A session and challenged them to a debate.
    They mocked GATA, saying we didn't rate a
    debate with them because we didn't have their
    31 years of experience. Here is their latest
    commentary, which reveals the value of all
    that experience:


    * * *


    GFMS Survey Sees Gold Price Averaging $330


    TORONTO (Reuters) -- The gold price is
    expected to average $330 an ounce in the
    first half of 2003, but a lengthy war in Iraq
    could easily move the market above $370, Gold
    Fields Mineral Services said in an updated
    gold survey on Thursday.


    The London-based commodity research and
    consulting company warned, however, that if
    the Iraqi crisis fizzles out and investors
    bail out of the safe-haven metal, gold could
    move below $310 an ounce once again. It said
    producers were expected to keep trimming
    their hedge books, which will see the global
    hedge book decline a further 135 tonnes in
    the first half of 2003.


    GFMS is a bunch of bullion dealer apologist
    hucksters -- either that or a bunch of
    dummies. It is really sad that the World Gold
    Council uses their work and pays them for it.


    Dave Lewis' commentary is timed perfectly:


    * * *


    "I may be going to hell in a bucket
    But at least I'm enjoying the ride."


    -- John Barlow, "Hell in a Bucket" (Grateful Dead)


    I've written before about the Texas Hedge, or
    the double-down strategy of keeping a price
    above or below some point in order to avoid
    making good on a contract. It is becoming
    ever more common in options trading as
    certain dealers (not all) try to avoid
    delivering on their short options.


    When I was cutting my teeth, so to write, in
    the options game, I was taught this was a
    poor strategy, as my individual trading was
    minute relative to other interested parties.
    As time went on, however, I saw how one
    could, temporarily, push prices up or down
    and hold them. Yet it seemed to me a fool's
    game. Why sell a commodity to avoid
    delivering the commodity on a short call if
    you are properly hedged? Even if you manage
    to push the price down at the right time, you
    end up simply buying back both your hedge and
    your newly shorted position.


    This line of thinking, however, breaks down
    once you think about leverage, or the art of
    trading much more of whatever the underlying
    concern is than you actually have.


    Going further along this idealistic line of
    reasoning, imagine that you are dealing with
    a commodity in short supply. In that instance
    it might cost 10-20-50 percent or more of the
    notional figure to actually deliver the
    goods.


    For example, a few years ago natural gas was
    in such short supply on the West Coast that
    it was far better to lose 5-10 percent on
    paper than to be forced to deliver in
    physical. Even better, given that some end
    users took the screen price as a "real"
    price, you could avoid delivering simply by
    keeping the price at expiry slightly below
    your short call strike.


    Last year some wise trader called this type
    of bluff in the gold market, exercising a
    call option even though futures were trading
    below the strike. Had everyone been properly
    hedged, my guess is that this would have been
    a bad strategy, but prices jumped through the
    strike, indicating the potential of a lurking
    Texas Hedger.


    With Gold blowing through and closing well
    above the $354.5 level in today's trade, I
    imagine we might be seeing a few more of
    these "unconventional" option exercises in
    both spot and futures and potentially even in
    the stocks.


    As we used to say during fast FX markets when
    clients complained our price was different
    from the screen price, "Then trade with the
    screen, idiot." More conventionally, let me
    suggest that a bird in the hand (an
    enforceable contract near the current price)
    might be better than two in the bush (trying
    to buy in the market with the screen showing
    prices slightly less than your strike).


    -- Dave Lewis
 
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