Gold Outlook 2011: Irreversible Upward Pressures and the China Effect

Well, my worst fears did not come to pass on Friday...and I'm oh so happy about that. Although both metals spiked down for a very brief moment at the New York open, most of the real price damage had been done by the time I filed my Friday column at 5:00 a.m. Eastern time.

Gold began to sell off around 2:00 p.m. Hong Kong time...and reached an interim low at the London a.m. gold fix at 10:30 a.m. GMT. From there, the gold price traded sideways into the New York open...with the low of the day [1,352.00 spot] coming moments later. Then the gold price took off to the upside and, according to Kitco, printed a New York high price of $1,380.10 at 11:00 a.m. Eastern time. From that high, gold got sold down ten bucks going into the Comex close at 1:30 p.m... and flat-lined for the rest of the New York session. The spot gold price was down $1.30 from its Thursday close.

The silver price chart looks almost the same as the gold chart...but, once the New York high [$29.38 spot] was in around 11:00 a.m. Eastern, the silver price got sold off pretty good...and finished down 37 cents on the day. Silver's low [around $28.30 spot] on Friday, unlike gold's low price tick, came at the London a.m. gold fix at 10:30 a.m. GMT.

The dollar didn't do a lot...finishing up about 35 basis points on the day...and its price action had nothing to do with what happened in the precious metals arena yesterday. Here's the 1-year dollar chart to put this past week's action in some sort of perspective.

Looking at this graph, one has to wonder if the dollar's rise will 'fail' at its 200-day moving average...or will it continue to power higher? How the dollar fares will certainly have an impact on what the precious metals prices will do in the short term. On the other hand, there have been long periods where the dollar and the gold price have risen together...so we'll have to wait and see which scenario develops as the month unfolds.

Not surprisingly, the precious metals shares saw their highs around 11:00 a.m. Eastern time, when gold hit its zenith in New York...and from that point, the gold stocks basically followed the gold price action, including the flat-line going into the New York close. The gold stocks finished unchanged on the day. Here's the 5-day HUI chart to put last week's action into perspective...and I must admit that it ain't pretty. However, it does look like we're approaching some sort of bottom.

The CME's Daily Delivery Report showed that 14 gold and 32 silver contracts were posted for delivery on Tuesday. JPMorgan was the only issuer in both...and the Bank of Nova Scotia was the biggest stopper in gold...and it was Prudential in silver. The link to the action is here.

You should have figured out by now, even if you don't 100% understand the delivery [issuer/stopper] process that I talk about in the previous paragraph every day, that virtually nothing happens in the delivery process unless JPMorgan is somehow involved in it. In the gold and silver price manipulation world...the buck stops with them. That's why all the 25+ lawsuits filed in the silver price fixing scheme name JPMorgan as the lead crook.

There was movement in both GLD and SLV yesterday. The GLD ETF showed another decline...this time it was 48,801 ounces. The decline in the SLV ETF was pretty chunky...it was 1,7098,883 troy ounces. It's hard to tell [because of the big price decline this week] whether this was a legitimate drawdown...or a user demanding silver immediately because it was urgently needed elsewhere.

There was a sales report from the U.S. Mint. Another 5,500 ounces of gold eagles were sold, along with a smallish 81,000 silver eagles. For the first week of January 28,500 ounces of gold eagles have been sold...along with 2,221,000 silver eagles.

While on the subject of silver eagle sales...here's a graph that was sent to me by Washington state reader S.A. showing silver eagles sales from 1987 to date. Do you have your share?

And, over at the Comex-approved depositories, there was a very large decline in their silver inventories...the largest that I can remember in a very long time. It was 1,778,294 troy ounces. There was pretty big activity in all warehouses...and the link to that action is here.

The Commitment of Traders Report [for positions held at the close of trading on Tuesday, January 4th] showed slight improvements in the Commercial short positions of both metals.

In silver, the Commercial net short position declined by 1,140 contracts...and is now down to 49,751 contracts...or 248.8 million ounces. Of that amount, the '4 or less' traders are short 205.4 million ounces...and the '8 or less' traders [which includes the '4 or less' traders] are short 278.7 million ounces.

In gold, the Commercial net short position declined by 518,800 troy ounces...and is now down to 26.46 million ounces of gold. Of that amount, the '4 or less' bullion banks are short 20.8 million ounces...and the '8 or less' traders are short 27.0 million ounces.

Although these declines in net short position by these eight bullion banks is all well and good..the real fact of the matter is that there's almost no indication that this past week's big price declines in both gold and silver are anywhere to be found in this COT report. As I suspected, the bullion banks pushed everything into the next COT report, which won't be released until 3:30 p.m. on Friday, January 14th.

Here's Ted's "Days of World Production to Cover Short Contracts" for all commodities that trade on the Comex. The graph is courtesy of sharelynx.com.

But, without doubt, there have been massive declines in the gold and silver short positions held by all the bullion banks in general...and JPMorgan in particular...during this week's bullion bank-instigated sell-off.

The Bank Participation Report for January [based on the same Tuesday, January 4th cut-off as the COT report] was a wonder to behold. In silver, the two big U.S. bullion banks [JPMorgan and HSBC USA] decreased their net short positions in December by 3,619 contracts...and are now down to 22,340 Comex silver contracts held short between the two of them. That's a decline of 13.9% from the December BPR. I would guess that 95% of that 22,340 contract short position in silver held by these two big U.S. bullion banks is held by JPMorgan.

Since we know from the COT report in silver [a couple of paragraphs above] that the Commercial net short position was 49,751 contracts...then Grade 3 arithmetic shows that JPMorgan holds approximately 42% of the entire Commercial net short position in silver all by themselves...a fact that CFTC Commissioner Bart Chilton has been harping on in public for the last little while.

There are ten non-U.S. bullion banks that hold a total net short position of 3,128 Comex silver contracts as of January 4th cut-off date for the report. That is an improvement of 866 contracts [21.7%] since the December BPR report. Divided up amongst these ten foreign banks, each bank, on average, holds short approximately 313 Comex silver contracts each. These are insignificant amounts.

In gold, the Bank Participation Report shows that 4 U.S. banks are net short 91,988 Comex contracts...which is down 11,170 contracts from the December BPR report. That's a drop of 10.8% in one month. These 4 U.S. bullion banks are short 34.7% of the Commercial net short position in gold.

The 18 Non-U.S. banks that hold futures positions in gold are net short 37,721 Comex contracts. This number represents a 17.5% decline from what they reported holding in the December BPR. And that amount only represents 14.3% of the Commercial net short position...and spread amongst 18 banks...each only holds a fraction of one percent.

What the January Bank Participation is showing is that the bullion banks, whether they be domestic or foreign, are getting out of Dodge. This is especially true of JPMorgan. Ted Butler was hugely encouraged by this report...and we both agreed that if we could get a snapshot of the COT as of the end of yesterday's trading, we would see another huge decline in the short positions of all the bullion banks...especially JPM.

This should lay to rest some of my reader's concerns about foreign banks taking over the short positions of JPMorgan. There was a lot written about this on the Internet in early December when the December Bank Participation Report came out...and it's blatantly obvious from the January BPR report that these fears had no basis in fact whatsoever.

¤ Critical Reads

Massachusetts Top Court Hands Foreclosure Loss to U.S. Bancorp

Today's first story is a Bloomberg piece that I lifted from a GATA release yesterday. The headline reads "Massachusetts Top Court Hands Foreclosure Loss to U.S. Bancorp"...The state Supreme Judicial Court yesterday upheld a judge’s decision saying two foreclosures were invalid because the banks [including Wells Fargo] didn’t prove they owned the mortgages, which he said were transferred into two mortgage-backed trusts without the recipients’ being named. The bank stocks took the news rather poorly yesterday...and the link to the story is here.

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ANOTHER CITY GOES: Chowchilla, Calif. Defaults On Bond

The next item comes from Thursday's Business Insiderwebsite...and is courtesy of reader 'David in California'. The headline reads "ANOTHER CITY GOES: Chowchilla, Calif. Defaults On Bond". The place only has a population of 11,000...so one can hardly call it a city...but it has failed to make its January payment on a bond issued to make expensive renovations to its city hall. It's easy to imagine that there are all kinds of U.S. cities and towns in the same situation. The story is only a handful of paragraphs...and the link is here.

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Never any blackout on Fed's private chats with investment houses

Here's another story that I 'borrowed' from a GATA release yesterday. It's a story out of Wednesday's edition of theNew York Postthat Chris Powell has headlined "Never any blackout on Fed's private chats with investment houses". The columnist, John Crudele, titles it "NY Fed's 'Mr. Inside' Dudley Flapping His Gums"...and starts off the story with the sentence..."The president of the Federal Reserve Bank of New York doesn't know when to keep him mouth shut." This story about insider information should come as no surprise to anyone...and the link is here.

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ECB forced to step in to calm market fears over Portugal

I have four stories in a row from reader Roy Stephens. The first is from Friday's edition of The Telegraph...and is headlined "ECB forced to step in to calm market fears over Portugal". It's a very short story...and the link is here.

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Beaten down euro in for another rough ride next week

Roy's next offering is a Reuters piece headlined "Beaten down euro in for another rough ride next week". The euro fell 3.3 percent against the dollar this past week, its worst weekly loss since mid-August...and a respite next week will likely not occur given an avalanche of euro zone bond sales set to test the market's resolve. It's another short story...and the link is here.

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Imbalances between East and West will grow and grow

Here's another story out of yesterday's edition of The Telegraph. It's headlined "Imbalances between East and West will grow and grow". Just ahead of the Seoul summit back in November, Mervyn King, Governor of the Bank of England, sounded the following warning...Unless the G20 collectively recognise imbalances as a problem and agree policies to unwind them over time, "then I fear that the next 12 months will be an even more difficult and dangerous period than the one we've been through". The first condition achieved some recognition at the summit, but not the second. Agreement on solutions remains as far away as ever...and that is real bad news, as it cannot go on forever. Someday it will stop...and when it does, the world as we know it will disappear. The link to the story is here.

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Silencing the Silent: Taseer’s Murder Exposes Pakistan’s Deep Divide

Roy's last story comes from the france24.com website. It's another article about the man who murdered Punjab Governor Salman Taseer. I ran one yesterday on this subject, but here's another one with a slightly different [and more ugly] take on things. The headline reads "Silencing the Silent: Taseer’s Murder Exposes Pakistan’s Deep Divide". It's a bit of a read, but it's worth your time...and the link is here.

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Buyers facing down the silver shorts, Turk tells King World News

The next item is a GATA release of a King World News blog with James Turk that Chris headlined "Buyers facing down the silver shorts, Turk tells King World News". This is an interesting read...and the link is here.

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An Interview With John Embry

Here's another offering from King World News that deserves your undivided attention...and that's An Interview With John Embry, Chief Investment Strategist at Sprott Asset Management in Toronto. I posted the blog earlier this week...but Eric has now posted the entire audio interview...and the link is here.

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Gold Outlook 2011: Irreversible Upward Pressures and the China Effect

Just a few days ago I posted a commentary by Nick Barisheff, the CEO over at Bullion Management Group in Toronto. Now he has posted a copy of a speech he has given entitled "Gold Outlook 2011: Irreversible Upward Pressures and the China Effect". Nick's outlook for gold in the new year cites three key factors: central bank purchases, movement away from the U.S. dollar, and demand from China. In the interests of full disclosure, I own a position in one of BMG's bullion funds...and have for a number of years. The speech is first rate...and the link is here.

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If some among you fear taking a stand because you are afraid of reprisals fromcustomers,clients, or even government, recognize that you are just feeding thecrocodile hoping he'll eat you last.- Ronald Reagan, 1964

Today's 'blast from the past' needs no introduction...either to the performer, or the song itself. So turn up your speakers and click here.

As I mentioned in the opening paragraph, I was relived that things did not turn out as badly as I had feared they might. There was almost no reaction in gold and silver to the jobs report, which turned out to be mildly disappointing...and it's hard to tell whether the subsequent rally in both metals in the New York morning session was new buyers, or short covering by the New York bullion banks. I suspect the latter, but can't be sure.

It's also not known whether we've seen the end of the bullion bank-inspired sell-off or not. Gold is firmly below its 50-day moving average...and silver came within 32 cents of its. Regardless of that, we are a levels of open interest that we haven't seen in ages, so [hopefully] the bottom is near.

Here's the 1-year silver chart.

Here's the 1-year chart for gold as well.

As I mentioned earlier this week, the time to buy is when blood is running in the streets...and there's certainly been a lot of that this week. There's still time to either readjust your portfolio... or get fully invested in the continuing major up-leg of this bullmarket in both silver and gold... and I respectfully suggest that you take a trial subscription to either Casey Research's International Speculator [junior gold and silver exploration companies], or BIG GOLD [large producers], with all our best [and current] recommendations...as well as the archives. A subscription to the International Speculator also includes a free subscription to BIG GOLD as well. And don't forget that our 90-day guarantee of satisfaction is in effect for both publications.

Enjoy what's left of your weekend...and I'll see you on Tuesday.