Gold - Could Be An Accelerating December
by Daan Joubert
[ME: THIS NEXT UPLEG WILL LEAVE MANY GOLD FOLLOWERS BEHIND... IT WILL SEPARATE THE MOMENTUM BOYS FROM THOSE WHO RESEARCHED MORE DEEPLY... THESE EARLY 20 MONTHS HAVE MANY CARPETBAGGERS LATCHING ON FOR A RIDE THEY DO NOT COMPREHEND... THEY WILL BE DROPPED OFF AT THE STATION, AS GOLD SURGES NORTH]
gold-eagle.com
Last week’s piece on the sword of Damocles referred to the Comex option close out on Monday 24th November and the large number of call options at $400 and just above that level. As it happened, a near crisis for the writers of the options was averted when a concerted effort to push the price lower succeeded.
In fact, it succeeded so well that gold briefly traded below $390, implying that the $390 as well as the $395 calls ended up out of the money. Since under normal circumstances the vast majority of – if not all – the options are settled in cash, even a small dip below its strike price is sufficient to let the call expire worthless. Now, if the owners of the slightly out of the money calls – say the $395 to perhaps the $405 calls as well – had taken up the options, converted to futures and then proceeded to ask for physical delivery, the market would really have heated up.
This did not happen and now, with December calls rapidly being switched into February it does not look as if fireworks from this quarter can be expected before the end of the year. However, there are more options and contract expirations to come and it would be surprising if someone with a deep pocket does not execute a major coup of this nature on the silver futures market.
Of course, because there is a supply of gold at hand in central bank vaults, the gold market is much less susceptible to a similar tactic. How much gold is left in the vaults we do not really know. But silver coming into really short supply after more than a decade of supply deficits, and the US Treasury having to purchase silver on the open market to mint silver coins, now that the US strategic stockpile has been depleted, such a coup in silver could be massively profitable. The question is perhaps not so much whether there are people with the funds and gumption to undertake such a coup; it might be more a question how one can avoid retaliatory measures once it is known who was behind it. There will be a lot of powerful players with very bank accounts full of red ink and it is unlikely they will easily forget what has happened – one can almost expect that at least some of them will wait for the means and the opportunity to repay the favour.
That is history. What is far more interesting is that the gold price moved above $400 on Monday and has been there ever since – except for brief moments when a new raid on the gold price is launched and it briefly dipped below the $400 level. The magnitude of the raids is apparent from the COT report in the US that gives a breakdown of the various players in the futures market. The short positions of the “commercials’ – i.e. the producers and bullion banks, players who can hedge – has increased by almost 23000 contracts last week. Now that is running up to a 100 tons of gold, paper equivalent, and is not peanuts at all. The heavy selling – with buyers not flinching, but taking up what is being thrown at the market – has resulted in the largest known short exposure among the commercials.
Surely a reason for major concern as the gold price holds above $400 and threatens to move higher.
The implications are two-fold. Firstly that the commercials stand to lose a vast amount of money if the gold price spikes much higher. So far they seem able to contain the damage, but sooner or later margin requirements will suck them dry; if the committees who look after risk management in these organisations do not pull the plug on the short positions and force them to start closing.
The second implication is that the gold price is currently being contained, in the face of strong and rising demand, by determined selling by the commercial interests. If they now should turn buyers, it will leave a supply vacuum; yet, at the same time, the evidence or the news that they are doing so should ignite a feeding frenzy among the gold bulls, which in turn will draw in many new buyers. With practically no supply coming into the market, and panic buying from the shorts who try to cover, it would be most surprising if gold does not move higher by $100 and more per week.
For many weeks.
Strong rand? Yes, we will still have a stronger rand according to the technicals. But with gold perhaps doubling in price early in 2004 the odds that the rand could gain against the dollar, down to say R4,00 or lower, is most unlikely. This means that the odds for a good jump in the rand gold price – and thus for the gold shares as well – are looking up.
When to pile into gold shares again? Difficult to say - with the situation highly explosive. Some unforeseen event could trigger a spike in the gold price at any moment and thereby set off the whole catastrophe, at least from the perspective of the commercials.
But one fact is clear – if one does not have at least a good foothold in gold equities, and physical gold as well, there is little hope of getting into the market once gold explodes.
Who knows? We might even see some action before Christmas.
3 December 2003 |
