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More Gold Hype: No Escape for Shorts

Summary:
Massive Gold Short Squeeze!?Via King World News, there is a "massive gold short squeeze" and  No Escape For The Gold Shorts according to Alasdair Macleod.The way to tie it in is to think of what the quarter end means. The quarter end for bullion banks means accounting — it’s the date they will value their positions in the market. Now obviously it suits these guys to keep the price as low as possible for that quarter end date (next Tuesday). And if you have a suppressed gold price, you are going to have a higher gold price afterwards. I think that’s why your reader’s observation makes an awful lot of sense. And in this current context I think it is also appropriate. They (bullion banks/swaps dealers) have tried to keep the price down. The swaps are now more short than they have ever

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Massive Gold Short Squeeze!?

Via King World News, there is a "massive gold short squeeze" and  No Escape For The Gold Shorts according to Alasdair Macleod.

The way to tie it in is to think of what the quarter end means. The quarter end for bullion banks means accounting — it’s the date they will value their positions in the market. Now obviously it suits these guys to keep the price as low as possible for that quarter end date (next Tuesday). And if you have a suppressed gold price, you are going to have a higher gold price afterwards. I think that’s why your reader’s observation makes an awful lot of sense.

And in this current context I think it is also appropriate. They (bullion banks/swaps dealers) have tried to keep the price down. The swaps are now more short than they have ever been.  

And this is a situation where the gold price is on the verge of breaking out. Arguably it has already broken out. They (swaps dealers) are just caught (short). There is no escape for them. So I think…to continue listening to this timely and powerful audio interview where Alasdair Macleod discusses gold being on the verge of a historic breakout that will trigger a massive short squeeze.

Why anyone would post an interview like that is beyond me. 

One look at the Commitment of Traders (COT) report is all that it takes to disprove it. 

Gold COT Chart 

More Gold Hype: No Escape for Shorts

COT Data

Here is the Metals COT Data.

Swap Dealers 

  • Long 69,802 Contracts 
  • Short 292,302 Contracts

Producers and Merchants 

  • Long 81,384 Contracts 
  • Short 170,995 Contracts

Managed Money

  • Long 205,519 Contracts 
  • Short 29,855 Contracts

Other Reportables 

  • Long 129,745 Contracts
  • Short 29,882 Contracts

Nonreportable Positions

  • Long 69,230 Contracts
  • Short 32,645 Contracts

Descriptions

  1. The Producers are the miners. They sell the gold they mine by selling futures. They are always short. 
  2. The Merchants are the jewelry makers and the industrial users. They are always long. They buy gold and use it.
  3. The Swap Dealers are the broker dealers. They are nearly always hedged (ie market neutral). Thus they generally do not give a damn which way the market goes. This alone tells you the "no escape" report is pure nonsense. 
  4. The Managed Money + the Other Reportables are the Big Speculators. They may or may not be hedged.
  5. The Nonreportables  are the Small Speculators. They generally are not hedged. 

Point 3 is in dispute but it should not be. The swap dealers have been short nearly the entire rise from $250 until now. If they were not hedged they would have been blown out of the water long ago.

This does not imply no manipulation. The dealers are proven manipulators especially if their hedges get out of balance, but their goal is to make money no matter which way the market goes.

As such it is ridiculous to suggest as  Macleod does, that the "bullion banks are about to get blown out of the water".

Moreover the COT chart proves the claim "The swaps are now more short than they have ever been," is ludicrous.

No Escape?!

Yes, Virgina, there is no escape from the silliness of that idea, from head to toe.

I am not the only one who caught the ridiculousness of the idea as expressed in  the article.

Spec Covering

-287,000 Contracts

Space Aliens

Straight to One of the Key Points

Bingo

The anemic volume (number of contracts) discloses the silliness of the claim.

The second key point that many fail to understand is that the swap dealers are hedged.

Thus, if there is a short squeeze it is precisely because the speculators are short not because the swap dealers are short.

Understanding Futures 

  1. In the futures markets, there is a long for every short. Contracts always net to zero.
  2. The swap dealers take the other side of the trade. They have to, and they are hedged. 
  3. Because the swap dealers are hedged, they will never be forced to cover. 
  4. At contract expiration, long speculators have to roll contracts, take delivery, or close the position by selling the contract. Closing the position by selling the contract is best viewed as long liquidation, not short covering.
  5.  At contract expiration, short speculators have to roll contracts, deliver gold, or close the position by buying a contract. 
  6. Although the merchants and producers play a part, it is primarily the speculators who drive activity as noted in points 4 and 5.

Macleod Wrong Three Ways

  • The swap dealers are nowhere near a record number of contracts
  • When speculators get hugely long it is not a sign of a pending short squeeze. Rather it is frequently a sign of over-optimism. When price turns lower long liquidation typically begins. 
  • Because the swap dealers are hedged, they will not be forced to cover. This shows that Macleod does not understand how the futures market works.

Gold vs Faith in Central Banks 

More Gold Hype: No Escape for Shorts

If you want to know what drives the price of gold over the long haul, please study the above chart. 

Short-Term Action

Short-term, the price of gold generally rises as longs build position and generally declines during long liquidation.

Monetary Demand

Over the long haul, it's monetary demand that sets the price, not short squeezes, not jewelry, not Martians. 

Monetary demand is a function of faith in central banks. 

I commented on monetary demand on June 1 in Speculators Dump Gold But Price Goes Up Anyway.

Judging from futures and alleged jewelry demand, the price of gold ought to be falling. But it isn't. Let's explore what's happening with the price of gold and why.

In the above article I noted that despite long liquidation (speculators dumped gold contracts) the price was rising anyway.

That is not typical as noted above in short-term action. 

I viewed that as a bullish signal. It is a bearish signal when price falls during long accumulation.

I liked my chances on June 1 and even more today. A short squeeze had nothing to do with it.

Please check out the charts I posted and the additional reasons I posted in the above link.

Mish

Mike Shedlock
Mike Shedlock (Mish) is a registered investment advisor representative for SitkaPacific Capital Management (http://www.sitkapacific.com/). Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

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