Ricks Picks header image

What Gold Lacks Is Short-Covering Panics


With the world in the throes of an unprecedented credit blowout, gold’s failure to crack $2000 barrier can sometimes seem mystifying – the moreso as the correction begun in 2011 stretches on, now into an eighth month. Gold has acted more like wheat or corn than like money. Shouldn’t it reflect the fact that dollars, euros and yen are available to an insatiable group of borrowers, mainly large banks, at no cost and in practically unlimited quantities? Indeed. And yet, lately, gold has been unable to muster the ire, even, of crude oil, which appears to be gathering thrust for its first foray above $120 since 2008.  Meanwhile, Comex Gold has been lazily backing and filling since last September. If gold is not oblivious to the steady and relentless destruction of currencies, it seems unpersuaded that this is what the central banks are accomplishing by design.

From a purely technical standpoint, gold’s reluctance to get in gear with crude, and to start acting like it knows what the central banks are up to, is not so mysterious. Let me explain.  I have written here many times that it is not bullish buying that drives stocks relentlessly higher in bull markets, but short-covering by bears. This was a dynamic I got to observe first-hand in the dozen or so years I spent on the trading floor of the Pacific Exchange. While bulls often rationalize their buying strategies by citing “fundamentals,” they probably understand at a gut level that PE ratios are no more useful a predictor of where a stock will be trading in six months than tea leaves. Small wonder, then, that bullish sentiment alone cannot summon the kind of torpedoes-be-damned buying it takes to drive shares through massive levels of supply.  But short-covering can, since the buying is rooted in the primal fear of losing money as a stock or commodity that one has bet against surges maniacally higher.

Who Is Short?

Unfortunately for gold bulls, this fear is nowhere to be found in bullion markets. Think about it.  Who are the shorts?  Mainly, bullion bankers with friends in the very highest places.  Shorting “paper” gold amounts to free money for them because, in a pinch, to cover short-term obligations, they can borrow as much of the real stuff as they need from their good friends at the Fed, which holds a reported 7000 tonnes of the stuff for its friends.  They are all aggressively united behind a monetary agenda of their own – one that is not particularly friendly toward $2000+  gold. Even so, and despite the ability of the bullion bankers to gin up a hundred times as much paper gold as their exists physical, quotes have muscled their way higher nontheless. Had officialdom’s suppression of the gold price been more successful, prices would currently be languishing below $500 an ounce. Instead, gold has traded as high as $1928, its ascent managed so as to avoid a day of reckoning for bullion bankers.  The easy money is still on the short side, and so it shall remain as long as Morgan Stanley, J.P. Morgan and their ilk can collude behind-the-scences with government to hold prices down. This alliance has proven remarkably effective – so much so that gold (and silver) have gotten cold-cocked at exactly those times when we might have expected paper shorts to get blown out of the water. One of these days, in response to a financial cataclysm whose dimensions cannot be precisely foreseen, those on the other side of the trade will press their claims for physical gold. We shouldn’t kid ourselves that The Powers That Be do not have a plan in place to turn back the mob. Although that might briefly appear to save the day for J.P. Morgan et al., it is not likely to save the financial system, nor perhaps even the Republic.


Win a Subscription Worth $106!

If you aren’t already receiving these commentaries by e-mail, sign up now and you’ll be automatically entered in a weekly drawing to win a three-month Rick’s Picks subscription worth $106.  Click here to register. What do paying subscribers get that lurkers don’t?  Plenty, including detailed daily trading “touts” and access to a 24/7 chat room that draws traders from around the world.

Please do not ask trading questions!

  • cosmo April 28, 2012, 1:44 pm

    Since most here have been onboard for some time, it is only a matter of patience. That little “one year change” number in Kitco has been in the green for the 10 years I have been watching it, even now its still at +9%. I quit the markets years ago as I refuse to legitimize the scam that we all know that they are. I would rather go for a walk on the beach or in the woods.

    GS and JPM will get their just desserts one day, just be ready for the mess that it will cause.

    Thanks for all your insightful commentary and Rick for providing the space…

    • Steve April 30, 2012, 6:01 am

      Cosmo, Now that is a thing of value. A walk on the beach or in the woods while refusing to do evil.

  • Steve April 27, 2012, 8:37 pm

    Maybe it is the looking glass and the reflection. See, gold has a value of 50 silver specie Dollars, and Dollars for the several States are valued at 371 4/16th grains of fine silver in a Coin struck by the Mint for the several states in union.

    What is real is that the fiat fraud of debt tally against the beneficial user is screaming up creating a debt pit that cannot be paid back. Hu’mans, or coporate men (color of Man) in distinction to Men are burying themselves in tally numbers. Since 1964/71 it takes 30 + – tallies to get to where the people once were at 1 to 1, quid pro quo. And then, a Man Extinguished Debt in Tender creating absolute ownership instead of discharging to become as a debtor in possession. Not only that, but the planks of the manifesto progressivley take 50% in tithe @ 30 instead of 5% @ 1 tithe like when this all started in 1971.

    Reflected in the mirror, that is where all of the clammer for increased metals price rests. Not in gain, but; in a destruction of value that must be paid back some day. People are trading debt instruments, not value. The notes and more notes and more notes must be paid back with more borrowing. That paper value of 1660 gold is nothing but a promise held by another person until the discharge is completed by notes brought into existence owing more in interest than notes created. Wallowing in the debt pit does not mean that it does not stink hog. Someone will pay the debt – who will it be, and when?

  • Jill April 27, 2012, 8:06 pm

    It seems that when we have disasters gold goes down more often than up, trading in the same direction as the stock market. When gold rises, more often than not, it seems to be a “risk on” asset, that people buy when markets overall are rising. I keep reading essays all over the Net that say the opposite, that gold should skyrocket when we have Europe problems etc. But I see the opposite happening in the real markets.

    • FranSix April 27, 2012, 11:10 pm

      That’s true, because gold is an asset without a yield, thus it fits well with dynamic hedging strategies that see no arbitrage risk in the underlying asset.

      So gold is sold at opportune times to take advantage of options in the treasuries. But there is one thing the markets have utterly failed to recognize, that gold will not crash as it had after 1997, thus there is a risk arbitrage.

      Once this comes across, then you get panic de-hedging and the price rises. The REAL dehedging eventually will be forced into the limelight when the 100X leverage can no longer be supported. What might cause that is anybody’s guess, but I would say a real monetary crisis somewhere in the world.

      We have not yet seen a mania in gold as you would have had in other metals, such as Copper hoarding, or Nickel, or Uranium.

  • chuckster April 27, 2012, 3:53 pm

    Those Indian women have the right idea. Buy lots of gold when you can each year. I just don’t understand where they keep it. I keep mine in a safe deposit box as to not get strong armed……..that scheme may have to be changed one day soon.

  • Rick J April 27, 2012, 3:31 pm

    Exactly right in my opinion. At the times of maximum behind the scenes stress, gold is suppressed so that the dumb public does not “hear the canary in the coal mine”.
    Everything possible must be done to save the franchise that is the printing press, for it is survival of the printers that is at stake.
    When an entire year of silver production can be sold in a few minutes on crimex, what can we expect? This is not price discovery, but price making, even if of a short duration. Physical gold is the only policeman involved in this process, since they cannot counterfeit the actual metal. Price direction is influenced in the short run by the bullion banks, but this cannot succeed in the face of massive physical buying, particularly by those central banks adding to their gold stocks and dumping dollars.
    Frustrating though, particularly as to share prices which are subjected to the worst of the abuse.

  • Seawolf April 27, 2012, 2:50 pm

    This situation in th PM sector is going to continue as long as investors continue to believe that buying shares of a tracking ETF is the same as buying that which is being tracked. Buying shares of a tracking ETF takes money away from the thing which is being tracked. It is like trying to drive a car with your foot on the brake and he accelerator at the same time.

    A tracking ETF not only has tracking error (negative) but is designed so that is does not affect that “something” which it is tracking. If investor money is going into a tracking ETF how can the “something” which is being tracked go up in price. Buying GLD SLV GDX GDXJ is putting a brake on bullion and the equities.

    • mario cavolo April 28, 2012, 9:08 am

      I think this is a helluva point Seawolf….where to find any intelligence on measurable implications and impact?

    • Seawolf April 28, 2012, 7:09 pm

      At the moment I seem to be the only person making this point. The serious bloggers all seem to be singing the praises of ETF’s. No one seems to have taken the time to look into any negative effects of these things.

      A volume and price study going back to five years before the introduction of the ETF’s should do it. At least that would be a start.

    • Seawolf April 28, 2012, 7:16 pm

      I did a one day comparison of the volumes of the four ETFs on april 25 against the top 10 holdings of GDX. the volumes were almost equal.

  • FranSix April 27, 2012, 1:36 pm

    There’s been an uptick in 3-mo treasury yields that came along with Operation Twist. If any interest rate might affect the price at a length, it would be short term yields as they narrow with the lease rate.

    Lease rates continue to be negative, which indicates that not much additional physical bullion is being sold, and that leased gold is being sold steadily.

    All of this says that either short term paper is being printed with abandon, or that demand for short term money including the money-market commodity, gold, has slackened, but that this has not affected the price.

    Gold prices are robust, rather than being soft.

    • Steve April 27, 2012, 8:49 pm

      relected – federal reserve notes are crashing – a Dollar is the same. Every saver of notes is loosing big time. Every debtor in possession is loosing big time. Its a bet between the belief that something valuless ‘federal reserve notes’ will become something of real value like specie money. What are the odds in Vegas for such bets ?

      What is of value ? Twenty-one silver specie Coins proving Liberty, or 10,000,000,000.00 federal reserve notes of no value as a tenant in fee. From one perspective being a task master slave is better than being a slave to beneficial use of frn. Maybe that is where most are today. Don’t worry about Liberty, just get as much as you can on the tally pole.

  • Mark Uzick April 27, 2012, 11:04 am

    As you pointed out, it’s the short covering that will drive gold higher, so with all the massive short positions gold’s rise is almost guaranteed.

    The only thing that holds gold buyers back from squeezing the shorts is the fear that in the race toward devaluation that has become a game of chicken between the central banks, the realization of the political consequences of the resulting financial devastation of savers, will cause the central banks to blink and a needed deflationary implosion to dominate the financial landscape.

    Imagine, for example, how the scenario might play out in the unlikely, but not impossible, event of a President Paul administration. No doubt other, less dramatic, possibilities exist for events to play out in ways unexpected.

    The 60 year interest rate cycle’s continuity, which predicts that treasury rates will soon begin a 30 year rise, will need to come to an end if the Fed’s determination to continue financial repression indefinitely can succeed.

    While it seems inevitable, who here is willing to stake everything on the fed’s successful defiance of this cycle? Everyone concerned about financial security ought to look into Harry Browne’s “Permanent Portfolio”. The only certainty is continued uncertainty.

    • mario cavolo April 27, 2012, 11:19 am

      …also been watching that 60 year cycle stuff Mark…. I don’t know, I mean cycles work like nature right up until some man-made thing decides to blow them out of the water making them completely meaningless…!! Seems to me we are in such times regarding so many backward looking historical stats and comparisons that I see getting continually blown into meaningless smithereens. How many times are we going to say “oh this has never happened before…” ? 🙂

      Meanwhile, I will suggest that I still favor that idea that the situations won’t play out in such armageddon like drama…rather, inflation and decline of currency purchasing power will continue to slowly boil the frog across the global landscape…Cheers, Mario
      Cheers, Mario

    • Mark Uzick April 27, 2012, 12:30 pm

      Mario, one day life on earth will end, human life ending long before that event; so cycles, be it sooner or later, all come to an end.

      But even though, in the absolute sense nothing is permanent, the political elites’ machinations not withstanding, these cycles tend to be far more robust that we might give them credit for being; they reflect the cyclic effect of the collective psychology of society in ways that are invisible to measurement and beyond the control of even the most powerful men and organizations.

      Like the weather, there’s little to be done about it except to recognize certain patterns as signs to exploit the opportunities of good days or to seek shelter from the probable stormy days of the ideas and moods – whatever be their source – “whose time has come.”

    • Steve April 27, 2012, 8:41 pm

      Mario, evidentually there has been no watching of the tides, or running of flood waters. While the dike may hold nature and hold back nature for a time- don’t forget to look at Japan about a year ago.

    • Steve April 27, 2012, 8:42 pm

      I agree with your second post Mark

    • Rick Ackerman April 30, 2012, 4:42 am

      My point, Mark, was that these shorts are not pishers; rather, they are bullion bankers with pockets so deep, and political friends so influential, that they will never, ever be driven to panic.

  • mac April 27, 2012, 10:04 am

    Ya see, China and some Asian coutries, they know what the Fed and its criminal actions re Gold are about. They got the algos of the Hedge Funds figured out too. Seldom do we see the gold price up in Asia. Why? Cuz they know what the Fed wants (to continue the paper dollar ponzi scam). So they sit in the weeds, even help price suppressio,n so they can buy, load up with real money at lower prices.
    Thank you mafia Ben and your gang, they sing! And thank you CNBC, thank you Bloomberg TV, for your anti-gold spin and lies. It is a perfect scoop of the treasure for the Asian needs.

  • John Jay April 27, 2012, 5:19 am

    Gold should continue up, just give it some time.
    Plenty of Central Banks waiting to stock up their vaults at a good price.
    Right now, the ZNM12 just hit the Lifetime contract high of 132^11.5 at 7:24 PM California time.
    My chart for ZN goes back to 2002 and I think that is also a decade high for ZN also.
    Let’s see what happens tomorrow, GDP at 5:30 AM Pacific Time.

Do you want up-to-the-minute technical analysis and forecasts for your favorite stocks, commodities, ETFs? Join our Take Request Session on October 6th!

No, I'm not Interested

Do you want up-to-the-minute technical analysis and forecasts for your favorite stocks, commodities, ETFs? Join our Take Request Session on September 15th!

No, I'm not Interested