December 3, 2010

With gold and silver shooting higher today, King World News interviewed Ben Davies out of London. When asked about the action in both gold and silver Davies stated, “We are on the verge of seeing a potential massive squeeze in the gold market. We witnessed this last month, and it appears to be rehearsing for the same play this month. Physical demand out of Asia is overwhelming the egregious paper gold shorts. If we are thinking this for gold, it is cubed for silver.”

“Even with deficit financing in the US, the authorities can’t create any job growth. People around the world are tapped out because of debt. The anemic jobs growth, although a lagging indicator, was more significant for the rise in the unemployment rate and the low average hourly earnings. The US is not going to be able to grow themselves out of their debt to GDP burden. The only way to grow nominal GDP is to continue debasing the currency through worldwide quantitative and qualitative easing.

Just when investors thought the US was poised for growth to help ameliorate the structural issues in the eurozone, the payroll numbers put pay to that. It’s no wonder the Chinese, as we discussed in the past, have now imported five times the amount of gold in 2010 than they did in 2009. The Chinese like to buy gold on the dips, they don’t like to go chasing the market. Just like they used to buy US bonds, now they are buying gold. As the recent PBOC spokesman implied, they are going to continue to divest their dollars into gold as a monetary asset.

So for now the downside is stymied in the physical bullion market, and with a large open interest in the $1,400 calls on the paper Comex gold market, we could see a repeat of the $1,300 call squeeze that we saw last month. The more we create value above $1,400, the more likely the market will act short on the paper side, and we could start to see the $1,600 levels that we discussed in previous broadcasts by year end, and perhaps with an overshoot to $1,800. One must always be wary when implied volatility levels are so low in such a bull market, and with so much uncertainty in the global economy, and its underlying fiat currency system.”

Ben Davies, along with James Turk correctly correctly called for this explosion in the metals when silver was still in the $17 to $18 range. Their timing was literally perfect. Davies has now issued a warning to the gold shorts, my advice once again is to sit back and enjoy the fireworks.