e.p., on a long term chart you can see the bearish trading channel in which the metal has been from early '96 until late '98. in late '98 it left the trading channel via a sideways move, and has since used the upper boundary of said channel as support - the last time at what has so far been the low of the bear market since 1980 which transpired last year. since then two major price spikes have occurred, that prove that this is a market in which a bearish bubble has formed, i.e. the paper short position is much too large vs. the physical supply needed to cover it. otherwise the Washington agreement would not have ignited a rally of $85 within a week.
the announcement by one major producer regarding the planned reduction of its hedging program ignited a one day $20 rally.
an incredible short position has been built up during the down (and now for quite some time sideways) trend via gold loans from central banks. an estimated 14,000 tons have been effectively shorted in this manner.
annual production is approx. 2,500 tons. demand is an estimated 4,100 tons this year, and has been rising rapidly every year during the last decade save one (the implication being that it will keep on rising). newly mined supply has stagnated during this time.
this shortfall between supply and demand has been made up for from the following sources: gold loans, CB selling and scrap.
producer forward selling has at the same time ensured steady selling pressure in the paper gold market.
since September last year the picture has dramatically shifted. the CB's that were most active in the leasing market have signed an agreement that has suspended all gold leasing activities for five years and limited selling from the 15 signatories to 400 tons per year.
other major CB's that used to be players in the leasing market simply can't play anymore, because 100% of their reserves have been lent out. for a fact Australia, Denmark, Kuwait have gold reserves only in the form of a piece of paper that is basically a promise that they will get their gold back one day.
the producers that have been badgered by the bullion banks into ever more insane hedging strategies have suddenly changed their tune in the wake of the Wash. agreement, as several prominent and fully hedged producers went bankrupt because of the price spike.
there goes another source of supply.
so lets see...demand 4100 tons...newly mined supply plus CB sales 2,900 tons. scrap 300-400 tons, shortfall 800-900 tons annually.
on the daily chart, a falling wedge...and 14,000 tons sold short through leases alone.
bullish sentiment at 20%, a 10-year low.
commercials long by a wide margin according to the CFTC's commitment of traders report.
furthermore the two price spikes were contained by a massive expansion of the paper short position, as the derivative books of the most active bullion banks reveal.
sounds like an explosive combination to me....
regards,
hb |
