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
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
- The Producers are the miners. They sell the gold they mine by selling futures. They are always short.
- The Merchants are the jewelry makers and the industrial users. They are always long. They buy gold and use it.
- 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.
- The Managed Money + the Other Reportables are the Big Speculators. They may or may not be hedged.
- 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
Not only just as easily – but far more accurately.
Only the Spec shorts have to cover. https://t.co/FX9Q6L8F4r
— Mike “Mish” Shedlock (@MishGEA) June 27, 2020
-287,000 Contracts
Agreed. The current -287,000 contracts does amount to shorts that need to cover in the future though “Squeeze” is a relative term to the size of COT, that doesn’t appear to have a bearing on historical price…to these eyes anyway. https://t.co/eUHpvKX1rE
— I hate pull ups (@LeamingtonCap) June 27, 2020
Space Aliens
Along with the gold price is “suppressed” by the Cartel…JP Morgan…space aliens…etc.
— Chris Temple (@NatInvestor) June 27, 2020
Straight to One of the Key Points
A good one! Btw the volume is anemic. It’s the diametric opposite of a short squeeze… https://t.co/px848Yg0yB
— Michael Norinsberg (@Mnorinsberg) June 27, 2020
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
- In the futures markets, there is a long for every short. Contracts always net to zero.
- The swap dealers take the other side of the trade. They have to, and they are hedged.
- Because the swap dealers are hedged, they will never be forced to cover.
- 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.
- At contract expiration, short speculators have to roll contracts, deliver gold, or close the position by buying a contract.
- 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
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
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.
Futures are a contract to buy or sell bullion, but on a future settlement date.
This is quite a useful explanation of hedging.
Wut?
The market provides places to hedge
How is the cost of hedging a neutral position any more expensive right now? Neutral market makers are not taking delivery.
Your so-called “massive demand” for bullion is dwarfed by the 200+ times more massive paper market
High premiums are being paid in the physical market due to shortages cause by Covid (shutting of National Mints, retail shops, transport etc). This is a supply problem not a demand problem.
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?
You need to be more specific.
The most famous name exiting the bullion banking world is Scotiabank.
But they have been cutting their personnel in that department for a good five years now and finally made the decision to cease operations 2018, with an unwinding thereof to take three years (the doors will close for good in 2021). And it is not just gold but all of their metals business.
Linking this to Gold’s dramatic move during the Covid Spring would seem highly disingenuous… yet many goldbug websites have done exactly that.
Perhaps you’re thinking of a different bank? If so, please provide some specific facts.
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.
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.
Aren’t the commercials just locking in the price of their mined Gold etc, they’re not outright short.
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.
Gold above 2000 by the end of the year is the easiest prediction.
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.
Your fourth paragraph infers that your second paragraph is incorrect.
When an economic system is flooded with liquidity, speculation begins to run rampant. This is how we get asset bubbles.
In all likelihood, Gold would’ve seen a bigger gain if The Fed had decided say in response to Covid and the O&G Crash…. “nah, we’re done printing, we did enough a decade ago”. See Mish’s Faith in CBs chart above for evidence.
Keep in mind we had currencies devaluing hugely from 1980 to 2000 and gold never even blinked.
“Keep in mind we had currencies devaluing hugely from 1980 to 2000 and gold never even blinked.”
The 5 year treasury yield was around 16% in 1980 and was still above 4% in 2000. The opportunity cost of holding Gold was much higher then with yields plummeting.
I think the excess liquidity you refer to will start spilling over into Gold. Just my view though, might be wrong. -:)
Gave your post a like.
What you’re describing above is the bribe The CBs offer bond speculators to continue buying bonds. While that likely had some effect on the demand for Gold, it probably wasn’t a big one.
Japan and Europe have been utilizing NIRP for some time now without a bigger jump in gold prices in those currencies than we saw in the FX markets themselves.
Even in the US, the opportunity cost has pretty much disappeared… but it took another crisis to get gold to move to where it was at the last crisis, despite a decade of VLIRP.
That’s why Mish’s Faith Chart is so important. With fiat currencies all financial crises are crises of faith.
The excess liquidity will flow into gold when more and more investors become worried that no other asset will hold its value as strongly. Lack of faith.
Which is why The Fed is in Backstop Everything Mode. Gotta make sure asset values don’t decline.
So the next step won’t be to buy gold. It will be to return to front-running The Fed (like bond speculators did during the period of interest rate decline you describe)… except on many more fronts.
I totally agree with Mish’s faith chart & that confidence in Cental Banks affects the demand for Gold. I also agree speculators have been/are front running the Fed by driving down yields and asset prices up. These are both linked, whilst the CB’s continue with this policy against a background of weak and falling earnings, confidence in their economic management will continue to decline. A bit like a Ponzi scheme, investors know prices won’t rise for ever, because without legitimate earnings the scheme runs out of a consistent flow of funds from new investors.
The Fed’s long term objective is price stability, not to hold prices at a particular level or drive them up, because they also know they can’t do that forever. Perhaps they’re in hold them up mode more than otherwise at the moment because of political pressure leading up to the election. However once they revert to their price stability mode they won’t be so concerned about equity prices falling, as long as they don’t fall too far too quickly. So not going up, or a gradual decline, to bring an element of fundamental reality back into play would be more acceptable to them. So faced with not going up or a gradual decline, what to do, which is where your sentence below is important and is what I was getting at in a roundabout sort of way.
“The excess liquidity will flow into gold when more and more investors become worried that no other asset will hold its value as strongly. Lack of faith.” This is where I think we are now.
Edit
“What you’re describing above is the bribe The CBs offer bond speculators to continue buying bonds. While that likely had some effect on the demand for Gold, it probably wasn’t a big one.“
Incidentally the demand for bonds was huge in the late 80’s and early 90’s, the explosion in demand for Eurobonds by retail investors and all & sundry was vast. I was a Eurobond trader during this period and all sorts of borrowers were tapping the market in all sorts of currencies which were then swapped against USD Libor less whatever they could get away with. Retail investors lapped up coupons in the teens for a long time.
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.
The market makers don’t use futures to hedge, rather something like GLD, OUNZ etc
I’m surprised but I stand corrected.
(Bullion) banks are among the 12 LBMA market makers and I’ve seen it stated in articles that they do use the COMEX to hedge and Covid-19 shutdowns in the spring disrupted their ability to provide physical COMEX settlement.
Even without that we can employ some reasoning.
For the first 4 months of this year (figures available only up until April), average clearing volume in the London market was 730 tonnes / DAY . Right now GLD, the largest ETF is holding less than 1200 tonnes TOTAL and average volume is 11.5 million shares. With each share representing 0.09398 ounces this equates to 1,080,770 troy ounces or about 33.6 tonnes / day. IAU is the only other ETF that does significant volume at about 22.4 million shares. But each IAU share represents 0.00955 ounces or 0.00955 / 0.09398 = 1/9.8 of the amount of 1 GLD share. So the 22.4 million IAU shares is the equivalent of an additional 2.29 million GLD shares. AAAU and OUNZ are also only 1/100 ounce less expenses and the volume of each is about 330,000 and 241,000, respectively. That’s insignificant.
I can’t see them using ETFs. The volume is not there and the futures would be cheaper to use as a hedge.
Edit: Here is a link to a Reuter’s article that mentions what I have seen elsewhere.
Note that JPM is listed as a hedger in the article. They are an LBMA market maker.
BTW, this activity also contradicts the “bullion banks are shorting to suppress gold” claim.
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?