This analysis by Dave Meger of Alaron comes the closest to my view as of the moment. IMO this rally is mostly supply driven, due to liquidity coming out of the market because of producers backing away from new forward sales. As gold gets delivered it is returned to the CB vaults. I think the impending collapse of Centaur is out there as well. People would argue that this would cause lease rates to drop. Not if some CB's are backing away from lending, possibly because of credit rerating or political issues.
I am keying on the Aussie dollar and SA rand right now. If they start to strengthen against the US, that removes the incentive for miners in those countries to hedge. If it (Aussie and Rand)moves enough, these miners will be under intense pressure to buyback given their extensive use of naked calls (see my post yesterday on delta hedging).
All and all things look bullish to me. There was a dip yesterday in some good names, and folks that aren't on board have a good entry point this morning.
Alaron comments:
Gold - The gold market has now seen a $14+ rally off almost 2 1/2 year lows. The rally started from a combination of bearish equity market sentiment, stagnation type economic numbers (the latest PPI and CPI data showing inflationary numbers within a slowing economy), a technically oversold condition, and rising lease rates. This condition has prompted the large speculative short position to start to cover. The latest COT report including options showed large speculators net short 63,263 contracts, a sizable short position.
The rising lease rates have been a major focus of the gold market for the past week. Rising lease rates are indicative of increasing demand or a tighter supplied situation and one would speculate that this has been a watershed factor in prompting short covering by large speculators. Would you want to be short large amounts of gold from prices this low in the current environment??? I wouldn't!
The 255.10 low in the April contract will now act as strong support and if this support is broken at some point in the near future in would be VERY negative for the gold market; however this is NOT our expectation. We expect the market to continue on to higher prices on the back of continued short covering. On Tuesday the market ran into strong overhead resistance at $270 and consolidated today. We expect this period of consolidation to lead to a break of the $270 resistance level and return to prices in the $280's.
Producer hedge activity has been sidelined due to the potential for higher prices and some stagnation in the dollar vs. the Aussie and Rand. Further gains have the potential to prompt producers to cover hedges and add to the strength in the market.
The short covering remains the theme along with the rising lease rates. Lease rates continue to vault higher as the physical market shows strong demand... this has been one of the most favorable signs the gold market has seen is quite a while. We entered the market after the PPI and CPI numbers early last week off the inflationary theme, the detrimental equity market situation, and the oversold condition of the gold market, but the lease rates now add to our reason to be long. The trade is working well we continue to trail stops.
We have heard many theories on the reason for the rising lease rates... could it be that a major player is simply borrowing to sell on the open market, not likely, as the selling element has yet to be seen. Could it be that a gold producer wants to cover some forward sales and return borrowed gold to a particular central bank, this is more likely. That means their bullion banker lender must buy physical gold and return it to a central bank. That tightens up the spot market. The reason, no matter, is seeing a direct affect on spot and futures prices and making shorts in the market feel quite uncomfortable. Central bank gold is rumored to be getting harder to come by and this could also be tightening the well borrowed gold market. Once again we note the potential for the continued short covering rally.
The COT report from Friday 2/16/01 showed the funds added to their net short position by 6,266 contracts leaving them still heavily net short 58,972 contracts, the commercials are net long 62,175 contracts, and the small specs are net short 3,203 contracts. |
