The Calm Before the Storm?

The nice run-up in the gold price between the Sydney close and the London open yesterday was just about all the excitement there was on Wednesday, as [much to my surprise] there was no follow-through to speak of during either London or New York trading. Gold made a couple of minor attempts to break through $1,020... but got sold off each time. As of this writing, the gold price has been sitting between $1,015 and $1,020 for almost the last 24 hours.

The silver price worked its way slowly higher all through Wednesday trading. This pattern has now extended into Thursday afternoon trading in the Far East as well. Trading has been very orderly in both metals.

The shares had another excellent day yesterday as the HUI continues to grind higher. But I must point out that the HUI, gold... and silver especially... are well into overbought territory, and it wouldn't surprise me in the slightest to see some sort of sell-off here before moving higher. The RSI [Relative Strength Indicator] for all three, haven't been this high since March 2008... eighteen months ago... and we all know what happened then. Here's the 3-year gold chart as a "for instance". The HUI and silver look similar, and are both slightly more overbought than gold.

It's hard not to miss the absolutely monstrous reverse 'head and shoulders' chart pattern. We closed at a new record-high gold price yesterday, and the 'point and figure' graph now shows a break-out to the upside. I have more on that further down.

Because of the changes in reporting for open interest and volume by the CME, I won't have any open interest data until tomorrow. The Comex had a far better reporting system than the CME, but that system is now history. All I can tell you is this... as the tech funds pile on their long positions and drive the price higher... the bullion banks pile on their short positions against them. There is no real-world 'price discovery' going on here. The producers and consumers of both gold and silver play no part whatsoever in the price of the precious metals that they either mine or use. This is, of course, against every commodity law every written for Comex trading. Gold and silver are the 'money metals' and the U.S. government has basically thrown out the trading rule book in order to suppress their respective prices. Hopefully Gary Gensler over at the CFTC will do the right thing by installing [and enforcing] proper position limits in silver... and enforcing the position limits that currently exist in gold.

The Comex Delivery Report shows that 126 gold and 16 silver contracts were delivered yesterday. There were no changes reported over at the SLV ETF. Ted Butler still feels [based on volume and price action] that around 30 million ounces is owed to the fund... and there hasn't been any sort of addition to the SLV since about 2 million ounces were added on September 3rd. Silver is up more than two bucks since then. The reason that they can't add any more is because it probably isn't available, so the ETF managers are forced to short the shares instead. But over at the GLD ETF, there was finally some activity, as another 245,258 ounces were added... which is only a fraction of what's owed as well.

There were no reported changes from the U.S. Mint yesterday... and over at the Comex-approved warehouses, another 399,818 ounces of silver were added to their inventories.

The usual New York gold commentator reported the following yesterday... "Today, world gold surged on the European open and again in the late morning, closely tracked by Euro gold. During the NY floor session, it withstood a serious sell-off attempt and closed on an upswing. December gold finished up $13.90 at $1,020.20--but it never matched the highs seen in the European morning. Estimated volume was 115,793 lots of which 53.6% had traded by 9AM, as December gold made its floor session high."

"MarketVane's Bullish Consensus for gold added 2 points to 88%, the highest this year, and a level not since March '08." Over the weekend, Australia's The Privateer cautiously observed that the breakout on its US$ 5x3 point and figure chart needed a further $15 to be confirmed. This evening it announced: Please note that this close above US$1,020 is FOUR clear 'Xs' above the US$1,000 double top on the chart set in March 2008 and February 2009. The entire bull market from its bottom is thereby re-validated." [The P&F chart to which Buckler refers is linked here... and it's well worth the look - Ed]

"Richard Russell's assessment: Skeptics claim that this is a "final-gasp breakout," but I disagree. Gold has been holding above the $1,000 mark for four successive days, and I think $1,000 will now be support instead of resistance."

"Various commentaries lay heavy emphasis on the weakness of the dollar in explaining gold's move. In fact, the US$ Index lost only 0.2% today and, as noted, Euro gold tracked US$ gold very closely on the rise--diverging only a little in the NY afternoon. There is real buying here."

Simon Black, reporting from Shanghai, had the following comments about China and gold in his Sovereign Man: Notes from the Field commentary yesterday morning... "Gold is quickly reaching the mania phase in China, and there are clear signs of it on the ground.

"About a month ago, we reported that for the first time ever, the Chinese government is promoting gold and silver as investments. And by "promoting," we meant cramming it down people's throats.

"We knew this was ground-breaking news at the time--a clear indication of long-term demand growth, as well as a sign that the government will be accepting higher inflation in the future.

"Ironically, this story was little noticed in the gold industry at the time, mostly because the information was only being circulated in China (in Chinese, for that matter). Fortunately, my friend and China insider Christine Verone was able to get me the scoop, and we ran it here first." [That's a fact, because that's how I found out about it, and reported it in my column the next day. - Ed]

"Since that report, a couple of things have happened; first, the mainstream media has latched on to the story about Chinese gold... Forbes, Moneyweek, Reuters, the blogosphere; it's out there now, and adding a bit of extra buzz to the gold market... and secondly, the government has stepped up its promotional campaign, and Chinese consumers have responded on cue. Gold demand has grown dramatically just this year, particularly as savvy local investors are starting to view Chinese stocks suspiciously."

"You can buy gold in China at any bank--even tiny banks in tier-3 cities sell gold. More importantly, however, the government is setting up official Chinese Mint stores all over the country.

"On the inside, they look like jewelry shops--armed guards, glass viewing cases, etc. But instead of diamond crusted earrings and white star sapphires, you see bars. Lots of bars.

"The government mints bars in sizes ranging from 5 grams (which are so tiny they're actually cute) to 1 kilogram. The prices are updated instantly--they have a Bloomberg screen, which tracks the spot price, generally indexed to the Renminbi price in Shanghai rather than New York or London (another sign of Chinese financial independence).

"The bars are all serialized and 0.9999 purity, the same as you would get from Switzerland. They are also certified by the gold exchange, which validates the quality. There is no tax, and the premium runs 10 renminbi per gram, or roughly $30 (US) per ounce.

"We went into several stores and saw Chinese people buying like crazy... all with cash. The most popular denominations were 10 grams and 50 grams--and I'm surprised the mint shops didn't sell out at the rate those bars were flying off the shelf."

As this precious metals bull market gathers a head of steam, all investors [including this writer] are still deep under water in all of their little junior producers or exploration companies that they're still hanging on to. Below is the graph from the Toronto Venture Exchange on which most of these stocks are traded. It's obvious that they have a lot of catching up to do, but when they do make their move, they're going to soar.

One of Casey Research's top publications covers a myriad of small [and not so small] exploration companies, of which I own quite a few myself. The publication is entitled The International Speculator and is well worth the high subscription price, as it has paid for itself [for me, at least] more than ten times over in the last couple of months. The link is here.

I note that today's commentary is running a little long, so I'm sure you'll be relieved to hear that I only have three stories today...two of which are gold-related.

The first is a Reuters story courtesy of the King Report. "Bank of America Corp and Citigroup Inc customers defaulted on their credit card debts in August at the highest rates since the onset of the recession, a sign that the banks' consumer lending woes are far from over." The numbers quoted in the report are beyond ugly!!! How can these companies maintain their credit card business with these types of loses? The story is entitled "U.S. credit card defaults up, signal consumer stress". The story is worth your time... and the link is here.

This next piece also appeared in David Galland's Casey's Daily Dispatch yesterday, but it's worth posting again. It's a piece from The Wall Street Journal entitled "What Price Suits Gold?". In it, Casey Research's own Bud Conrad gets quoted... along with Congressman Ron Paul. It's worth the read of course, and the link is here.

And lastly is this Bloomberg story with a headline that should warm the cockles of all gold bug's hearts... "Kinross Says Gold Industry Faces Reserve Crisis". This is not 'new' news, however. Many commentators over the last ten years have pointed this out repeatedly. The CEO of Kinross, who spoke at the Denver gold conference yesterday, said this... "Globally, production has been in decline since the peak of 81 million ounces in 2001 to 77 million ounces last year, and we see that decline continuing long term." And don't forget, dear reader, that as of right now, the bullion banks are short north of 31 million ounces of gold... that's 40.2% of last year's gold production! The CFTC [and even worse... your gold mining companies] say, hear, and do... nothing! The story is well worth the read and the link is here.

I note, as I type this last paragraph, that there has been some activity in both gold and silver starting with the Sydney close and progressing into the London open. Volume is already pretty hefty in both metals, but it remains to be seen what the U.S. bullion banks have in store for us when the Comex opens for business this morning. You, dear reader, will find out long before I do, as I will be sound asleep when the action starts.

I hope that the rest of your Thursday goes well, and I'll see you here on Friday morning.