Dear Dennis

You noted the tendency for gold to plunge

over weekends, and expressed concern about

it. Great call!

The well-publicized bear market in gold has

actually been five weekends in which gold

futures either slumped or collapsed over the

weekend, which meant that when trading

began in Europe and North America, the gold

ETF (the GLD) and the gold mining stocks

plunged. I too have been puzzled, because

those weekend massacres in the futures

markets in Asia occurred at a time when

Chinese demand for bullion, bars and coins

was strong—most notably with people lining

up to buy coins.

As this was unfolding, the short position on

gold futures was skyrocketing to an all-time

high—while the short position from the

Commercials—miners and refiners and

jewelers—was declining to one of the lowest

levels on record.

This past weekend may have been the turning

of the tide. Gold futures actually climbed at

the opening in Asia and held their gains even

though the bullion ETF (GLD) was weak in

Europe and North America and gold stocks

were mixed.

My take is that the hedge funds were making

a fortune shorting futures in relatively thin

Asian weekend markets and that game

became challenged by (1) a nice bounce in

gold futures prices, (2) a nicer bounce in

stocks’ prices, and (3) the revelation that

hedge funds face huge cashouts from

investors because of terrible overall

performance. You can bet the margin clerks’

pencils have been brandished with new vigor

in recent days and this weekend buying of

futures was driven by the need to raise cash

at a time of that awe-inspiring total short

position.

The GLD has in recent days significantly

underperformed the futures—a rare

disconnect. Where there is confusion among

the various ways to speculate in or invest in

gold, there must eventually be reconciliation.

To me, this means we have seen the low in

gold and investors in hedge funds with

humungous short positions in gold futures

should be very, very afraid.

I remain of the view that the well-managed

gold miners are the best way to invest in gold.

Their unhedged reserves in the ground are

the leverage factor that can produce huge

price swings in the short term, but long-term

investors in gold get most of those reserves

at ludicrously low cost.

Don Coxe Coxe Advisors LLP