More Gold Hype: No Escape for Shorts

Mish

Gold is up against major resistance. Can it blast through the $1800 level?

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 

Gold COT 2029-06-26

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 

Gold vs Faith in Central Banks 2020-01-01 PNG

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

Comments (23)
No. 1-10
TimeToTest
TimeToTest

I don’t know if the price will go up or down. What I do know is governments are beginning to hedge the US dollar.

The fed is trapped and everyone knows it. Stop printing and credit freezes. Print more and asset inflation cripples the middle class more. Wage inflation is the only way out and that is next to impossible in this current climate.

Gold along with many other finite resources will get a bid overtime. Silver is hated but is very scarce compared to its price. Platinum even more so.

People can’t wrap there mind around gold as money but the question is - How does the Fed ever get out of this gamma loop?

Scooot
Scooot

You’re right Mish, I get fed up with reading about it too, the market makers use futures to hedge. Their internal limits wouldn’t allow them to be short (or long) to the extent they’d get “blown out of the water”. They might under or over hedge within their limits but that’s relatively minor in the big picture scheme of things.

Scooot
Scooot

I still like Gold, for 3 main reasons.

Equity prices will stop rising, and any prolonged period without any capital gain will swing the risk reward further against holding them.

Bond prices have much less upside potential and are therefore less of an equity hedge in portfolios.

Governments, intend to carry on borrowing heavily to spend. The UK in the news today stating they’ll borrow to spend on infrastructure rather than impose austerity on its population. Therefore fiat cash doesn’t seem to be an attractive option over the long term either.

tokidoki
tokidoki

Gold above 2000 by the end of the year is the easiest prediction.

truthseeker
truthseeker

Many years ago when the price of gold was around $350 an ounce, I started buying gold with my mother’s money so I could use my own money to earn interest income since rates were at great levels back then, especially compared to now. I did talk to her about my plan, since I was getting worried about our horrible budget and trade deficits so that she needed some insurance to protect her other investments, assets. Had someone who knew the future had told me what our budget and trade deficits would be in 2020, I would expect gold to be very much higher than it is at the present time.

Carl_R
Carl_R

Thanks for posting this. Don't expect people to believe it, however. They have been waiting for a price boom to "bankrupt the bullion banks" since gold was $350 and silver was $5. Even though it never happened, they are true believers, and can't be convinced that it won't happen.

Six000mileyear
Six000mileyear

Actually, its the chart of the commercials that we need to look at. Despite a nearly 50% increase in price, commercials would have been blown out of the water. They have been pretty much short for a full year, and are generally correct at major price turns.

anoop
anoop

with all the talk of “covering your shorts” i decided to give up on shorts altogether and now just wear pants. it may be less comfortable in warm weather but at least there’s no more anxiety.

gcarleton
gcarleton

I get your points Mish, but you also need to explain why certain bullion banks on the Comex were indeed caught short recently and are now closing down their operations on the Comex?

TaxHaven
TaxHaven

Try to look at this over YEARS, not a couple of months. Forest. Trees. Alright, they're "hedged". But who's providing the hedge? And at what COST? (It must be SOARING). Now try separating "comex data" from real life: there's massive demand for physical bullion whether it appears in paper gold reporting or not. It stands to reason. It's LOGIC. When everyone, absolutely everyone, tells you that the dollar is going to SINK versus "gold", they mean bullion. Not "comex futures". Despite the intricacies of this "data", the dmand (for METAL) is an irresistable force which cannot be captured in that data.


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