Better leave the late HUI trashing at that and end this commentary with what I see coming this month of August, and articulated so well by Dave from Denver...

Thursday, August 2, 2012

Central Bank Monkey Business

The thing about the Fed non-action is that every meeting they don't do something increases the likelihood they'll HAVE to do something at a subsequent meeting.

- Dave in Denver

We wouldn't have the extreme volatility in the markets that surrounds Central Bank policy-decision meetings if analysts and traders bothered to think through the process of what happens if the Fed, ECB and Bank of England do not start the printing presses back up in a major way. I don't know of anyone, who if asked point blank how the western world solves its debt problem without extreme currency devaluation either by printing or default - and printing is in fact a de facto default - doesn't come to understand that the likely solution will be more printing. And a lot of it, quite frankly.

Hell, even yesterday it didn't take a painstaking syllable by syllable dissection of the FOMC statement released to realize that the Fed is firmly on track to print a lot more if the economy doesn't recover. Recover? LOL. On a real inflation-adjusted basis, the GDP never climbed out of a recession. Just ask the millions of people who have either gone on social security disability or took down student loans and went back to "school" since 2008.

At any rate, I wanted to share some thoughts on why many of us believe that the precious metals market is getting ready to take off again based on looking at the technical data embedded in the weekly Commitment of Traders report and daily open interest reports.

To review quickly, it is now well known and accepted by everyone who trades and analyzes the gold and silver trading on the Comex that a couple key large banks - JP Morgan and HSBC, primarily; Scotia, Barclays and Deutsche Bank secondarily - manipulate the trading in gold and silver by engaging in massive short-selling of futures on the Comex.

In fact, there has been no other market in history in which the ratio of the short interest position in the futures contract exceeds the available supply of the underlying commodity by the degree to which the short position in gold/silver futures exceeds the readily deliverable availability of physical gold and silver. In gold and silver the paper short positions on the Comex exceed not only the actual physical metal readily available for delivery in Comex vaults by several multiples, but it also exceeds any reasonable time measure of days of mining production globally of gold and silver. It's actually become absurd to the point at which most of us who understand the truth of the situation now wonder if the CFTC, SEC and Justice Department are in reality staffed and run by a group of Helen Kellers (deaf, dumb, blind).

To further review, when the net short position in gold and silver taken on by the large banks reaches a relatively high level - in the context of a relatively high overall gold/silver open interest - the market inexplicably corrects in a violent and abrupt fashion, as the large banks who are short begin to offer an avalanche of paper contracts for sale and use the obvious "technical" levels on the chart to trigger large-scale selling by the large hedge funds. The latter being the "investor" group who has taken the other side of the big bank short position.

Well, we've had one of the larger, longer corrections in the metals during the 11 year+ bull market in the metals. Not surprisingly, the COT metrics have reached statistically extreme low levels. The net short position of the big bank manipulators is at an "outlier" low level. Concomitantly, the net long position of the large hedge funds is also at an "outlier" low level. Here's some thoughts I shared with a colleague earlier today:

The gold o/i dropped another large 6,626 yesterday. It's now under 400,000. Over 6,073 of the overall drop in the last 3 days can be explained by deliveries. This is on the heavy side for the number of deliveries in the first few days. I think the rest of the o/i drop yesterday - some in December 2012 and some in April 2013 can be explained by hedge funds getting out of the way of the Central Bank absurdity this week.

Since 9/1/09, the gold o/i has dropped below 400k only once and that was 4/24/2012. Based on this, I'm not sure the banks stand to benefit much from more o/i liquidation and there's a massive amount of room for the hedge funds to pile in once the Central Banks start printing in earnest again. The o/i hit an all-time high of 650,000 on 11/9/2010.

Silver o/i actually increased yesterday. It's been increasing in the context of an extraordinarily low net short position held by the big banks, the swap dealers net long and the large spec hedge funds holding an extraordinarily low net long position.

During the metals bull market, extreme low net positions by the banks and low net long positions by the hedge funds have preceded large moves higher in gold and silver.

So that's where things stand in the precious metals market from the Commitment of Traders/open interest perspective. Throughout the duration of this bull market, and especially when the open interest "run-off" is part of an unusually large correction, the precious metals have subsequently made an extended run up to new all-time highs.

What makes this time around even more interesting and compelling in terms of trying to judge how high "high" will be is the extraordinary and ongoing accumulation of large quantities of physical bullion by several Central Banks (China, Russian, South Korea, Mexico, Iran, etc) and the extraordinarily deteriorated financial and economic condition of the United States (at the Federal and State levels), the EU and England. The former will place extreme stress on the paper short positions in gold and silver and the latter will soon compel a massive amount of paper money to be printed.

I will not put a time frame or price target out here publicly, but I will say that the next move higher in the metals has a high probability of shocking everyone except the most ardently perceptive observers