This Could Rock Gold Prices
My longshot pick Direxion Daily Jr Gold Miners Bull 3X ETF (NYSEARCA:JNUG) has soared more than 400% since I first recommended the pick back in January, riding a wave of soaring gold prices… But this could just be the beginning of the move in gold bullion.
However, the chart below clearly shows how the upward progress of the pick was constrained by the newest and latest chapter in the “Gold Wars.” By which I am referring to the fact that the so-called commercials on the Comex (loosely defined as any trading entity that manages paper or non-physical gold trading) went into May with the largest short position in gold and silver ever recorded and clearly looking for a “battle royale.”
(I have covered this topic in previous essays. The argument I put forward is that, since the Treasury and the Fed have adopted the position that gold is an “enemy of the State”—a rising gold price negatively impacts the unbacked, fiat dollar—they have overtly and covertly encouraged—nudged—key banks and trading houses to adopt massive short positions. Positions which, in any normal market, would be considered an illegal attempt at manipulation, given that such positions are 100% paper and of a size and sell pattern clearly intended to move price.
However, the precious metals pits are not a normal market. They are, in fact, the most manipulated market on the planet. One of the mechanisms of covert encouragement used by the authorities is a complete lack of oversight and prosecution for such activity. In other words, if gold were a duck, then no hunting license is needed. Every day of the year is duck hunting season!)
The chart below shows the recent (local) high in my pick (maximum potential gain since inception) and also the recent interference caused by sudden and dramatic dumps of paper gold on the market—sells of a such a size that they completely collapse the bid stack and smash the gold price $10.00 to $20.00 at a time, usually in mere minutes, and usually dumped in increments exceeding $1.0 billion of the notional value at a time.
Significantly, not one of these “smashes” has ever taken place in Shanghai, the ONLY market on the planet where, by law, gold only trades in the physical form and every sale must be matched by physical delivery:
Clearly, the extreme action in the pick is mirroring the extreme action in the entire sector. Some of the issues to be considered, therefore, are as follows:
* The precious metals sector is one of the top performing sectors of the year, but clearly headwinds are developing. For those who have not already done so, is it time to take the money and run—or add to positions on weakness?
Among the many things that the above chart tells us is that, overall, only a relatively small portion of the damage suffered by the sector since the mysterious (and deservedly controversial) 2011–2015 beatdown has been repaired. There is no technical justification whatsoever for the notion that, after a small bounce, the sector is overbought, overextended, or toppy.
On the other hand, the current connection between the price of gold and the mining sector (which this pick represents) presents a volatility that is mind-boggling with the constant possibility of a pullback or consolidation. The answer, therefore, depends on each investor’s personal tolerance for risk, and each investor’s individual view on where the sector is headed over the next few years.
* What has driven the sector so far in 2016?
Prior to the current skirmishes in the Gold Wars, the sector was driven from the beginning of 2016 by a combination of the following: a progressive lack of confidence in the central planners; a progressive lack of confidence in fiat currency; seeing NIRP (negative interest rate policies) become a reality, which—at the very least—destroys the argument that precious metals offer a lower yield than debt instruments; a progressive awareness of how badly the sector was maligned and oversold; a progressive awareness that the buck may finally have topped or may be topping; a progressive awareness of the ongoing dismantling of the petro-dollar, the core artifice that has supported the buck since Nixon “closed the gold window” in 1971; a progressive awareness of how Russia and China are working together to wean Eurasia, and even portions of South America, off the buck; a progressive awareness of how seriously overbought the equities market is relative to organic earnings; and a progressive awareness of how bonds have nowhere to go but down as rates ultimately rise. Oh yeah, and a sense of burgeoning dread about where world markets are headed next.
* Why did the “junior” sector (which is the core of this specific play, the JNUG ETF) so dramatically outperform the seniors—and will the trend continue?
I covered this in the April update, explaining that the seniors would start to target (acquire) the juniors as the sector recovered and while the juniors would benefit in the short run, the seniors would benefit in the long run. Right now acquisition activity in the precious metals space is at levels not seen for a half-decade. And that trend is just starting, a fact confirmed by many news services. (Source: “Goldcorp is Back and Spending,” Silver Doctors, May 16, 2016.)
* OK, what about all those articles pointing out, over and over, how the commercials are short gold at higher levels than at any time in recorded history?
Again, this merely underscores how serious (and somewhat crazy) this phase of the Gold Wars really is and how high the stakes really are.
One of my favorite examples—of many to choose from—is the action on Monday, May 16, 2016. The week prior to that date, gold had experienced a few “mystery hits” from parties unknown (i.e., blunt-force dumps of billions of dollars of paper gold, which collapsed the bid stack).
On the morning of May 16, however, the SGE fix quietly raised the price of gold $10.00 (relative to the Comex close on the previous Friday). However, at exactly 10:30 a.m. in the subsequent Comex session, someone once again dumped billions of dollars of paper gold on the bid stack, causing an initial gold price decline of exactly $10.00. (Sources: “‘Someone’ Dumps 2.3 Billion Paper Gold,” Zerohedge, May 16, 2016; “Epic Battle over Gold, Silver Continues,” Silver Doctors, May 17, 2016.)
The most interesting part of this tale? This happened while the buck was in clear decline during that particular session, 100% contrary to the narrative that the MSM (mainstream media) has been spoon-feeding everyone for literally years. (See also the comments from Andrew Maguire quoted just below.) Some UFC fights aren’t even this good!
As we moved forward into the action of the last few sessions, the anti-gold crowd became emboldened by the possibility that the Fed might raise rates in June. This, in turn, scared the longs into a state of stupefaction and allowed the sellers to use their paper shorts (born of the largest “open interest” position ever recorded on the paper exchanges) to bring gold down from its earlier testing of the $1,300 level to below $1,250. The corresponding drop in the mining sector—and, of course, JNUG—was quite dramatic, especially on Wednesday, May 18.
We will never know precisely what happened—because of the deliberate opacity of the paper exchanges in New York and London—but it seems reasonable to suppose that many of the shorts who entered near $1,300 simply covered—for monster profits—after the approximately $50.00 drop.
As for accusations that the shorts knowingly and deliberately used blunt-force trades in the billions of dollars to create the very circumstances that allowed them to cover and profit—which is technically “illegal manipulation”—the regulators have not enforced these rules in years and are unlikely to start now. It seems that when you attack gold, it is virtually a “protected” trade. Suddenly, you have low friends in high places.
The good news? Historically, every time in the past that such an energetic suppression of gold prices have been undertaken, it has collapsed under its own weight. The current suppression seems to have begun in 2011 with a “naturally occurring” pullback in the yellow metal, which somehow morphed into more aggressive selling in 2012. And then, the coup de grace, carpet-bombing via the infamous Friday gold price smash of April 2013—a smash from which, technically, gold has never recovered!
One of the most overlooked studies on this topic was the painstaking work done by analyst Paul Mylchreest, who concluded that starting in 2012 (a key date, see above), as quantitative easing (QE) and its clones spread worldwide, central banks were initiating and financing a bizarre “pair trade” that essentially was “long Nikkei/short gold.”
The highly detailed study suggested that the central banks, shielded from oversight, investigation, or accountability and using money they created at will, had found a novel way to meet two of their goals simultaneously: keep the moribund Japanese economy from collapsing and keep gold from rising, thereby calling into question their fiat currencies.
(We do know that such pair trades are nothing new to central bank strategists—one such trade kept the Swiss franc in lockstep with the euro until, with great fanfare, the Swiss could no longer stand the pain. [Source: “Swiss Euro Peg Broken,” CNBC, January 15, 2015.])
* Won’t rate hikes from the Fed destroy the nascent gold/mining bull anyway?
This is a controversial issue and not as clear cut as many would have you believe.
First, if you look back a century or so and do your research, you will see that gold has on several occasions gained during a rising interest rate environment. (Source: “Fed Hike Empty Threat,” Investment Research Dynamics, May 20, 2016.)
Nonetheless, because the Fed and the Treasury and the Street are trying to sell a narrative that is continually seeking omens and portents that are gold-negative (discussed in prior essays), the algos and fast traders have embedded into the system programs which automatically slam gold upon the slightest sign of dollar strength. Traders are therefore being conditioned—just like Pavlov’s dogs—to consider that hikes are automatically gold price negative.
This “meme” is, of course, heavily supported by the commercials (see above), who are heavily short gold already—and grab any opportunity, any headline to demonstrate their ability to create and short paper gold at will and to make this threat seem more real than it actually is. I suspect the reality is that any rate hikes are limited by the too-real scenario that Washington simply cannot manage its debt with significantly higher rates.
It can barely manage its debt now. (See, for example, the site 100% devoted to the “U.S. Debt Clock” here. The site includes a tab at the bottom right covering the ratio of the gold price to total debt over the years. A reversion to the mean may be closer than anyone expects.)
There is also the issue of whether other nations will sit idly by while the U.S. once again takes steps to raise the buck, given that such action does violence to those countries that are pegged to the buck or have taken major loans against the buck when it was cheaper or issued derivatives based on the buck—a category which includes most of the developing world and much of the developed world, too.
(For example, China’s unlikely acquiescence in such a move, given its large holding of U.S. Treasuries, is a concern for Washington. Last week, following the Fed’s hint that another hike was possibly due, China unilaterally devalued the yuan, taking it to its 2016 lows. This was considered by market observers to be a “warning” to the Fed. (Source: “China Sends Hawkish Fed a Message,” Zerohedge, May 18, 2016.)
The other way to consider this point is to suggest that too much attention is being paid to the dollar and investors are not noticing where the “real” gold action will ultimately come from. (See below.)
* What factors, currently not factored into the current gold price of the PMs are “still in the wings” and still waiting to be considered by traders?
The recent admission of precious metal manipulation by Deutsche Bank, even though lacking follow-through, has at least raised the possibility that with the sector artificially suppressed for a period of years, the true pricing of the precious metals complex—whatever that may be—is nowhere near current levels and is probably much higher. Similarly, the impact of the allocated bullion exchange and the SGE gold fix (both discussed in great detail in my previous essays) are so far being felt only subtly. Presumably, over time, we will see their influence over the sector increase dramatically.
Ongoing blatant shorting of “paper gold” by the commercials in this current month—explained earlier—only added fuel to the fire as the war between the bulls and bears effectively reached levels never recorded before. This will ultimately resolve in dramatic fashion, one way or the other. London gold-trading insider Andrew Maguire recently said, for example, that if gold were to trade above $1,308 for a sustained period, the resultant short covering by the “wrong-sided” commercials would be historic and gold would soar. (Source: “Interview with Andrew Maguire,” Silver Doctors, May 15, 2016.)
* What should gold investors be watching for in particular? Is there a “wildcard factor”?
First, and I mentioned this before, watch for a falling out among thieves. Recently, for those who notice these things, we had the very strange anomaly of Goldman Sachs bashing gold prices with a “Sell” recommendation—nothing new there!— while the other paper gold trading giant JPMorgan suddenly and out the blue recommended buying gold with a near-term target of $1,400. This news was all the stranger for the fact that, statistically, over the last few years, JPMorgan was one of the largest paper gold shorters on the planet! (Source: “J P Morgan Calls for $1400 Gold,” Bullion Vault, May 11, 2016.)
Also, something really interesting and quite rare, in the above-noted interview with Andrew Maguire, he specifically referred to the inevitability of a “reset”—perhaps the single most dreaded word in economics today!— as the only way in which the trading desks in London, and by inference New York, could ever find credibility again. Maguire specifically said that in London (which is where his trading desk in located), his colleagues trade about eight ounces of paper gold for every one physical ounce they actually possess. (Actually, that number is relatively conservative: in New York, the accepted ratio of paper gold to actual gold is generally accepted to be in excess of 400 to one.)
Maguire underscored that since these predominantly paper trades are influencing the price of real gold, in markets like the SGE, these players are theoretically “on the hook” to deliver metal they do not actually have. And, when that day comes, the world will see these paper markets for the sham they are.
(And, even at these arguably insane “fractional reserve” gold trading ratios in New York and London, we do not even know if the physical gold actually available for delivery is already “pre-hypothecated” to someone else? If true, this would make the actual ratios many times higher than even the most conservative estimates would suggest. Don’t laugh—remember when Germany tried to get its gold back from the Fed, gold that had “special stampings” to indicate ownership? What little gold it actually got back did not have those markings!)
The specific use of the word “reset” for the first time places Maguire in a select group of prognosticators that includes such names as Jim Rickards, Jim Willie, Willem Middelkoop, Ron Paul, Paul Craig Roberts, and Catherine Austin Fitts, among others. (Source: Ibid.)
However, and this point cannot be over-emphasized, the average trader is woefully uninformed about the possibility that (discussed in my extensive interview here with Willem Middelkoop) ongoing, rotating, secret meetings have been taking place for some time to examine the possibility of bringing gold—in a form yet to be determined—back into the world monetary system.
In my view, this is the ultimate “wildcard factor” for gold prices, and, if true, has the potential to impact gold more than any short-term dollar volatility possibly could.