Something BIG happened in the gold market this year and very few investors understand the significance. While precious metal analysts debate whether the huge gold market rally since the beginning of the year is sustainable, I am beginning to wonder if certain indicators are no longer reliable.
As I have stated over and over, if just 1-2% more of the population moved into physical gold and silver, it would be game over. There just isn’t enough metal to go around… only a much higher prices.
Okay… let’s get back to really interesting information.
Most precious metals investors have read about the huge price move in gold and the large flows into Gold ETFs & Funds in the first six months of 2016. However, very few realize just how significant the changes have been in the gold market if we compare it to the past.
This chart is the Monthly Change of Transparent Gold Holdings from Sharelynx.com. These holdings represent Gold ETFs, Funds and Repositories, such as the Comex:
From the beginning of 2009 to the end of 2011, these total gold holdings increased approximately 45 million oz (Moz). So, as the price of gold moved up from a low of $780 at the beginning of 2009 to nearly $1,900 in September 2011, total gold holdings increased 45 Moz. Now, compare this to the massive 25 Moz increase of total gold holdings in the first half of the year as the price moved up only $300.
The significance of this present change in the gold market can be better seen in the chart below:
The average annual increase in total gold holdings during the 2009-2012 period was 15 Moz compared to 25 Moz for the first half of 2016!! If demand for gold continues as strong in the second part of the year, we could see upwards of 50 Moz move into these total gold holdings versus 45 Moz for the 2009-2012 period.
That being said, I highly doubt these Gold ETF’s, Funds and Repositories are receiving all the gold they report. Why? Well, if we look at the Gold Supply-Demand situation, the gold market will experience a large deficit for the first half of the year. According to the World Gold Council, the huge surge in Gold ETF & Fund demand caused a 151 metric ton (4.8 Moz) deficit for Q1 2016:
If we assume total Gold ETF & Fund holdings doubled to 700 metric tons (mt) in the first half of the year (they increased by 363.7 mt Q1 2016, shown in the table above), this will likely push the deficit to over 300 mt or 9 Moz for 1H 2016.
So, how does a net change of Gold ETF & Fund flows of 831 mt (-131 outflow 2H 2015 + 700 mt inflow 1H 2016) since the second half of 2015, not impact the gold basis as reported by Keith Weiner of Monetary Metals?? In Keith’s last update, he stated the following about gold:
The price of the dollar continued to drop (i.e. the price of gold, measured in dollars, rose). And the scarcity of gold (i.e. the cobasis, the red line) rose. So far, it’s looking like a bounce off the bottom of the abyss. But it is notable that it happened with a rise in the price of the metal.
Our calculated fundamental price of gold is up a further $50 ($100 higher than on June 24). Now the fundamental is only $170 below the market price.
What Keith is stating here is that if the gold price was set to really rise, the BLUE LINE (gold basis) would be trending down, not up. Even though it fell a bit recently, the trend has been moving higher since the beginning of March. When the blue line trends higher, according to Keith’s analysis, there is more abundance of gold.
So, how does 25 Moz more of gold demand into the Gold ETF & Fund Market during the first half of 2016 not impact the gold basis, as reported by Keith Weiner??? How much does an additional 25 Moz impact the market??? Global gold mine supply was a little more than 1,500 mt (48 Moz) in the first half of 2015. This new Gold ETF & Fund demand devoured 50% of global mine supply, not including gold jewelry, industry, bar-coin or Central Bank demand.
I will tell you how 25 Moz of gold moving into the Gold ETF’s and Funds doesn’t impact the gold basis….. because more paper gold is accounted for than the physical gold in their inventories, or some of the gold that is being reportedly held by these ETFs & Funds are owned by several parties. Thus, the gold basis would not be able to provide an ACCURATE reading if the supposed “abundance of gold” was due gold bars with several owners.
Again, how does a 25 Moz movement of metal in Gold ETF’s & Funds in the first half of 2016 not impact the market or gold basis when there was a 4 Moz outflow in the second half of 2015??
This is the issue we face today. The market is bathed in fraud from top to bottom. Nothing is as it seems. While I use certain data, information or indicators to forecast mid-long term trends, I try to stay away from short-term forecasts. Yes, I did publish a 20 year chart showing the 50 MA of Silver and how the $20.35 price was a huge trend line. This was not something I look at, but what other big traders pay attention to. If big traders are still controlling the market today, then it makes sense to see what they are doing.
Regardless, the huge $300 price move in gold since the beginning of the year has set a record in another aspect of the market. The Commercials, which are the bullion banks, hold the highest net short positions ever:
The price of gold is shown by the BLACK LINE, while the COMMERCIALS are in RED and the LARGE SPECS are in GREEN. The Commercials have controlled the price of gold and silver forever it seems. When the Commercials hold a record high net short position, normally we see a reversal and correction lower in the gold price.
As you can see in the chart, the Commercials hold a record 325,462 net short positions. For those new to the precious metals market, short contracts are a bet for the price to go lower, while long contracts are a bet that the price will go higher. The LARGE SPECS are large traders and hedge funds (GREEN) that are betting on a higher gold price move, while the COMMERCIALS (RED) are banking on a much lower price.
Now, when I said, “The Commercials are banking on a much lower price”, I wasn’t just making a pun. Because the Commercials are the big bullion banks like JP Morgan and HSBC. If we go all the way back to 2006, the Commercial net short position (RED DASHED LINE) has never been higher. This is also the same for the LARGE SPECS. They hold the largest amount of net Long positions (GREEN DASHED LINE). Even when the price of gold surged to $1,900 in 2011, the Commercials net short positions were substantially less.
At some point, there will be a Commercial Short Squeeze, which would result in a skyrocketing gold price as the bullion banks scramble to buy back their positions. If the situation in the European banks continues to disintegrate, the Commercials may be forced to either ADD more shorts or COVER and buy back their positions. We will see….
So, there are several interesting questions we can ask.
I will continue to come across individuals who tell me that “YOU CAN’T EAT GOLD” or write comments stating that the information in my articles is not worth reading. This doesn’t bother me a bit because I am concerned about the 5-10 year horizon. My next article will include some updated U.S. energy data. Let me tell you, WE ARE IN SERIOUS TROUBLE and there isn’t much we can do about it.
Unfortunately, most of the analysis out there is way too specialized so the analyst community falls victim to the LEFT HAND not knowing what the RIGHT HAND is doing.
I call this as INTELLIGENT STUPIDITY.
While it’s true you can’t eat a gold bar, you can’t eat a 401K either. That being said, I would bet anyone during the next financial and economic collapse that you will have a lot more options holding physical gold than a worthless 401k.
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