Global Physical Gold & Silver Rush may Instigate Manipulators to Play Short Again
Strong & widespread demand of physical Gold & Silver Bullion after the recent break in prices is likely to push up prices in the futures markets also.
Gold Prices have hit $1427 as the metal climbed for a fifth day in its longest rally this year as the biggest slump in three decades boosted physical purchases. Silver Prices too gained modestly. Most traders & investors are now convinced about the US Economic growth story, the US Dollar’s strength & thereby the Fed soon tapering off its monthly monetary injections. Both these factors will make more & more traders aggressively enter sell positions in the Gold & Silver Futures Markets at all substantial price rises triggered by physical demand for the bullions. The retail physical Gold & Silver markets showed “exponential increases in premiums globally. Demand for physical Gold Bullion and Gold Jewelry picked up as prices dropped, especially in Gold crazed India – the world’s largest Gold consumer. There’s been an enormous rush to buy, with news reports of strong demand and rising premiums over spot price for Gold in many Asian countries & not only India. The volume for the Shanghai Gold Exchange’s benchmark cash contract surged to a record 30,440 kilograms on April 19, according to data on the bourse’s website. The U.S. Mint also reported very strong sales for Gold coins. High premiums mean that the Gold & Silver supply is drying up and the same will show up soon in the paper Gold & Silver markets. Higher Gold & Silver Prices earlier used to get translated into fresh longs but now will trigger fresh shorts after having witnessed the worst slump in 33 years & this activity will be exploited the most by the Gold & Silver Market manipulators. This view is also supported by the fact that despite the current strength in the physical market, ETFs – exchange-traded funds saw another huge day of outflows, with 540,000 ounces worth of redemptions last week. Long term Gold & Silver unit holders are still looking to exit positions especially at these higher prices compared with the lows seen last Monday and Tuesday. Gold Prices are yet about $100 lower than the levels seen before last week and that doesn’t sound too encouraging to most for a promising sound return. Most Gold & Silver market investors are now feeling nervous & discouraged from investing for the long term. The largest factor for this nervousness is projected as the huge sell off & the massive & continued Gold ETF redemptions. Speculation has been rife that Central banks in Europe may sell Gold Holdings to raise funds. Until we see a meaningful decrease in the net short positions in Gold & Silver, pricing is going to remain very volatile. Investment in Gold & Silver Futures will no longer be viewed as a safe haven, but a momentum investment.
Fresh & a Massive Global Tide of Gold Demand:
Reuters reported that the state oil fund of Azerbaijan plans to buy 12 metric tons of Gold in 2013 as it seeks to diversify its portfolio holdings. This planned purchase would be 1.4 tons more than the potential sale of 10.6 tons of gold by Cyprus. This Gold buy plan barely raised an eyebrow in the bullion market; however, as the Cyprus Gold sell plan was blamed in part of the recent Gold sell-off. The Cyprus sell plan was considered important from the view point that it may set a precedent for other distressed European nations, who have much larger Gold Reserves at their disposal, to follow. The fear was that, if this happens eventually, would set off a massive landslide in Gold Prices. The China Gold Association said retail sales surged April 15 and 16. Imports by India may jump by 36% in the three months through June compared with a year earlier, the Bombay Bullion Association Ltd. said April 18. The US Mint sold 167,500 ounces so far in April, heading for the biggest monthly total since May 2010. That compares with 62,000 ounces sold in the whole of March.
Gold Wagers by Hedge Fund Defy Worst Price Slump in 33 Years:
Hedge funds increased bets on Gold rallying after prices plunged the most in 33 years, underscoring billionaire John Paulson’s view that bullion will rebound, reported Bloomberg. Central-bank stimulus will “eventually lead to Inflation,” Paulson & Co. said in a letter to clients obtained by Bloomberg News, reiterating a bullish outlook for bullion. The hedge fund is the biggest shareholder in the SPDR Gold Trust, the largest exchange-traded fund backed by the metal. The price plunge was a “panic event,” Catherine Raw, a fund manager in London at BlackRock, which oversees about $3.8 trillion, said in an interview April 16 on Bloomberg Television. Fund managers and other speculators increased net-long positions in gold by 9.8% to 61,579 futures and options in the week ended April 16, U.S. Commodity Futures Trading Commission data show. Investors turned bullish on Silver for the first time in three weeks. Wagers on higher prices across 18 U.S.-traded raw materials climbed 5.1% to 453,467 contracts, the first gain in three weeks. A two-day, 13% drop in Gold Prices through April 16 drove prices to a two-year low (reaching $1,321.50 on April 16), erasing $560 billion from the value of central-bank reserves since the metal peaked in 2011. Official- sector purchases and demand in Asia will support bullion, Paulson & Co. said in a letter to clients last week, joining BlackRock Inc., the world’s biggest money manager, in predicting a rebound. The U.S. Mint’s sales of American Eagle Gold Coins surged eightfold this month from a year earlier.
The Bearish Reality behind Rising Long Positions in Gold Futures:
While the net-long position in Gold climbed last week, most of the gain was attributable to a retreat in short holdings rather than an increase in long wagers. The divergence shows that the gain in the net position may reflect short traders taking profit, rather than investors becoming more bullish, according to Stanley Crouch, who helps oversee $2 billion as chief investment officer at New York-based Aegis Capital Corp. “Sometimes you have to peel the onion when you look at this data,” Crouch said. “It looks like that after such a big drop; people who were short were ready to take their gains. That might also be why the price stabilized, and it could mean that it’s even more vulnerable now.” Short positions narrowed 8.2% to 59,742 contracts, and longs gained 0.1% to 121,321. The short holdings reached a record 70,126 in the week ended March 12, and are still more than triple the average since 2006, when the CFTC data begins.
Assets in ETPs backed by the metal tumbled 11% this year as investors shunned the metal in favor of equities and inflation remained subdued. Societe Generale SA said April 2 that the metal was in bubble territory and would fall to $1,375 this year, when it was $200 higher. Goldman Sachs Group Inc. advised traders on April 10 to sell the metal. Prices may need to drop to as low as $1,050 after gold entered a “new reality,” Deutsche Bank AG said April 18. “This drop happened so fast and so violently,” said Mary Ann Bartels, the chief investment officer of portfolio strategies at Merrill Lynch Wealth Management, which oversees more than $2.2 trillion in assets. “People are asking ‘Why do I have this in my portfolio?’ But when we run the analysis, nothing has changed, gold adds diversification. Unfortunately, sometimes a diversifying asset doesn’t go up.”
Central Banks View on Gold stands divided after Global Sell-Off:
Central banks are divided on whether the metal is cheap enough to increase investment. Sri Lanka’s central bank governor said April 16 falling prices are an opportunity for nations to raise reserves. Reserve Bank of Australia’s assistant governor, Guy Debelle, said at a lunch in Canberra the same day that gold has no “intrinsic value.” Money managers took $3.7 billion from commodity funds in the week ended April 17, said Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Outflows from gold and precious-metals funds totaled $3 billion, he said. Investors are holding a net-long position in silver of 7,694 contracts, the CFTC data show. That compares with a short position of 560 a week earlier and is the most bullish outlook since Feb. 26. The funds trimmed their net-short holding in copper to 27,412, from 32,850 a week earlier.
The Gold & Silver Price Supportive Factors:
The upcoming US Debt Ceiling vote and uncertainty across Europe have scope to revive the safe-haven status of Gold and Silver. Correlating factors could lend support, but should Gold & Silver fail to respond, the hurdles are likely mount further and risks may rise to the downside. Gold is also unlikely to find support from a weaker dollar in the near term. The relationship weakened as the US Equity market started to outperform. Monetary Easing programs are expected to be kept on for an extended period of time to offset the drag from fiscal policies. The broader macro backdrop remains supportive for Gold and Silver, given the ongoing global balance sheet expansion, real interest rates remaining negative, loose monetary policy and risk of longer-term inflation. Despite the heightened uncertainty across Europe, Gold and Silver have remained focused upon the US market and the better-than-expected macro data has weighed upon Gold and Silver Prices.
With Silver having been hit more than Gold in the recent sell-off, I would bet on a stronger Price Rally in Silver more than Gold – whenever it comes around.
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