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.
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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
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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:
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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:
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"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).