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Gold To New Records As Market Maker Bullion Bank Fails

May 01, 2020 6:59 AM ETBNS, JNUG, NUGT, UGL, GLD, GDX, GDXJ, UGLDF, BNS:CA86 Comments


  • Mining stocks have climbed 10% since gold topped at $1,790 on April 14.
  • Open interest has collapsed since February and gold keeps climbing. The last time that happened was 2011 as gold climbed to all time highs.
  • Scotiabank, one of only 13 market makers of the London Bullion Market Association, is closing its metals division.
  • Watch the new Gold (Enhanced Delivery) Futures on the COMEX for any spread with standard futures, and delivery stats.
  • Gold should be heading back to old highs in a matter of weeks.

The run to all-time highs in gold is getting very close now, measured in weeks. Gold futures, the fall of a major bullion bank, and very bullish price action in the gold mining sector all point to an imminent upside jolt in gold prices up to, and perhaps even past, records in dollars. Gold is already comfortably past all-time highs in Swiss francs, euros, yen, Chinese renminbi, and pounds. The only laggard is the US dollar. The chart below show gold priced on different currencies since the September 2011 highs.

Gold has been in a gentle correction since April 14 when it hit highs of $1,790, but I don't think this will last for much longer. I expect the next move up to take gold up to and perhaps past all-time highs at $1,923. Here are my reasons.

Bullish action in gold stocks


Since capitulation in gold mining stocks in mid-March, the space has exploded higher by nearly 70%. This by itself isn't all that surprising or indicative of an imminent move in gold because miners were extremely oversold back then and a bounce was to be expected. Some mining stocks fell back very close to bear market bottom lows hit in December 2015 while gold itself went nowhere near its lows at all. What is more indicative of an imminent move is that despite gold's minor correction since April 14 (see chart below), gold stocks have continued trading higher by nearly 10%.

ChartMining stocks tend to predict moves in the underlying metal, and this time will likely be no different.

Record Collapse in Open Interest Fails to Dent Gold

When open interest contracts on the COMEX, the gold price tends to fall with it. Bullion banks, which sell gold futures fractionally backed by physical gold, buy these contracts back at

This article was written by

Austrolib profile picture

I invest in the light of Austrian Business Cycle Theory and cover monetary trends for the purpose of timing the credit cycle. My marketplace service The End Game Investor helps subscribers manage the risks of, and profit from the ongoing fiscal and monetary crisis precipitated by the COVID-19 pandemic. I use gold, silver, and associated stocks and investment vehicles in a low-risk high-return setup.

Analyst’s Disclosure: I am/we are long UGL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I may initiate a long position in NUGT over the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (86)

I am just wondering why demand for physical gold can't get satisfied, while the price of paper gold is still not rising, or even getting pushed down...
Well, you can listen to the conspiracy theorists, or you could notice that some refineries and mints are not running (including Royal Canadian Mint which produces those wonderful maple leafs as well as many small bars).
The crunch is easing up -- I looked at the Kitco site yesterday out of curiosity, and a number of silver and gold products that were unavailable two months ago are back in stock.
The pantry has been stocked @Nick007 ?
@Austrolib I was wondering for short term at least this will be tru for silver as well. It’s open interest has gone down so much but trading volume has increased.
kiann profile picture
Hi, @Austrolib , great article.

Another key reason for the Gold price holding steady, while open interest craters 30%.

Wouldn't it be because of the unprecedented money-printing exercise (Fed increase their monetary base by $2 trillion to $6 trillion now, and still climbing fast) , as well as the other main Central Banks?

Key ultra-rich investors try to preserve their wealth by shifting to hard assets, rather than keep it in debased fiat currencies?
Austrolib profile picture
hopefully that is happening. If it isn't it will soon. It's only a matter of time, and not much at that. If you position yourself in a way that you can tolerate quick selloffs, you'll be fine.
I do not see where you can ascertain extremely bullish action in gold miners. They are lagging physical on every conceivalbe time period since 2011 other than the last 4 weeks. And that is mainly a catch-up on the carnage relative to physical prices seen in the February/March crash. If anything, miner performance is a reason for caution, not exuberance on gold. Everybody and their brother (and sister) are now bullish on gold and miners with Central Banks printing their asses off. This week a popular German financial magazine had its cover painted in Gold and titled "Gold will blow off to 3.000 or more" and belatedly covered Ray Dalio's bullish thesis on Gold. This is not the environment for a huge rally in the markets, this kind of exuberance is usually indicative of a larger top.
Now don't get me wrong, I have held significant positions in physical since the mid 1990s and have accumulated miners on weakness ever since 2014. I am sitting on huge (paper) gains and have no intention to sell a dime. But my position does not make me blind to the realities in the markets. Watch out, gold is gonna top in the not too distant future and tank by at least 30%. Of course, I will continue to accumulate if I am correct. If not, well, my gains on existing positions are simply gonna a'grow. Life can be soo easy if you made the right decisions at the right time.
Nobody makes the right decisions at the right time @Default Smeller . You need smelling salts.
I pity you @kimbillro. The smart money makes the right decisions at the right time. Now I did not say I am always right. That is most def not the case, I have paid a lot of tuition in the school of hard knocks and it was expensive. That HAS made me smarter when it comes to investing, it shows in my investment bottom line, consistently and for many a year now.
Fast Track to Financial Independence profile picture
The charts clearly show a break-out for the miners and gold. There will be pullbacks, but 30% seems unlikely. The general public is still not thinking about gold, and the market seems to think there's a V-shaped recovery. Portfolio allocations are very small.

In my view, "smart money" is a useless expression, as it implies the existence of a class of investors that systematically outperforms, versus "dumb money"-class investors that are always misguided. We've all seen the statistics on fund manager performance over time relative to benchmark.
You know things are getting interesting when the criminals start exiting stage left

"Something like this has happened once before, and that was in 2011 leading up to gold's final blow-off in September"

I remember 2011 was the prior gold peak and gold started a long and harsh decline afterwards.

Are you suggesting another rally followed by another long and hard decline? Or am I reading too much into your words?

Also, gold has had a good run for the past couple of years. Wouldn't the normal course of action, after a multi-year run, be a downward correction rather than a continued upward shift?

Thank you.
Austrolib profile picture
Not predicting a pullback at all. Just saying that the last time open interest fell into a rising gold price was during the most extreme phase of the last bull market in 2011.
@Austrolib I would suggest this times things are actually different in the sense that bullion banks are literally liquidating which will actually lead to a massive short squeeze on paper PM contracts.
@TheBoringAnalyst @Austrolib

Wouldn't a "short squeeze" on paper gold price cause an increase in physical gold price?
Shrekish profile picture
Any more these days you cannot simply pay attention to just one segment of the markets, even if that is the only segment that you are actively trading in. You have to have your ear on the railroad track to listen for what is coming down the road.

Personally I am exclusively in PMs due to the fact that I think there is a serious dislocation of fundamentals across other markets, (energy comes to mind), and I am too much of a coward to dally in riskier endeavors like FX. That said, I do try to keep up and understand what the macro picture looks like as seeing the overall direction of the global economy will tell me what to anticipate in the PM mining sector.

Here is a link to a conversation that occurred back on April 17th of this year between Raoul Pal and chartist Peter Brandt on You Tube. https://youtu.be/TMkx8OZMd_0

These two are not going to give you a "DO THIS!" commandment, it's not how they roll. But if you sit and listen to them discuss different segments of the markets, you might pick up some insight, at least as to where these savvy gents think it may go.

As always, Caveat Emptor.
I think that gold would be definitely higher only it is blocked by people who are standing behind the fiat currency. They do not want to lead to financial panic because then everyone will see the value of paper money.
Article today...CNBC: "Across the industry, do you think there is going to be some really serious pain?"

Peterffy: "There is about another half a billion dollars of losses that somebody is sitting on... and I do not know who those folks are."

So, it is with great interest that we note that the CME Group, said its precious metals-trading COMEX subsidiary entered into an amended credit facility for a $7 billion revolving secured credit facility.

Pain is coming...
Fast Track to Financial Independence profile picture
Peterffy was talking about losses on May oil futures, nothing to do with precious metals.

"Which begs the question: is there a potential $7 billion shortfall about to emerge as a COMEX member collapses - whether due to a physical gold shortfall or otherwise - and if so, what happens to the price of gold if the market suddenly realizes there is a massive hole backing billions in gold paper deliverables?"

Do CME / COMEX normally obtain such large credit facilities?
Deflation is coming. It's already being printed in the March CORE CPI. Demand has already collapsed and high unemployment is going to sustain this deflation for quite awhile. The hint that you got was JPowell already said that we don't have to worry about inflation at all. He's not even going to try to push inflation up.
Austrolib profile picture
@What-the demand in every hyperinflatinary currency is always at the absolute minimum. The only thing demanded are basic needs, food clothing and shelter. That doesn't mean there isn't hyperinflation. The collapse in demand is only for goods that people no longer want, like cruises, oil, flights, restaurant dinners, luxury homes.

For basic needs, demand is about to skyrocket. The price of basic necessities is about to go much higher. Demand falling cannot fight the amount of money now being printed. Prices can rise even when demand falls because the currency is literally collapsing. People buy things at that point not because they demand them in the classic sense, but because they just want to get rid of money.
Impossible. In europe there's so much food it's being thrown away. Plus now everybody has started growing their own. Food prices will implode this year.
Alpha-Seeking Gold profile picture
BS Le-Bluff... check the facts.
Fast Track to Financial Independence profile picture
"The fall of a major bullion bank"? Sounds catastrophic. The reality: BNS closed its metals trading desk. Very different. There is no bank failure here. I'm bullish on gold, but this sort of blatant exaggeration just undermines the case.
@Fast Track to Financial Independence

Why did it close?

Is it possible that it closed due to increased potential for failure?

Some businesses will choose doing so over risking a very public, and nastier, outcome.

I am not saying that is what happened, but it is a reasonable possibility.
They wanted out. They tried to sell it in 2018 and could not find a buyer and as a result had already scaled it back considerably (to the point it was no longer a core business) before deciding to just shut it down. It will be wound down over time, ending around the beginning of 2021.

There were about 140 people working in the metals group (this includes industrial as well as precious metals) 5 years ago. That number was down to around 15 before the latest announcement, so that should provide some idea of how much they had already curtailed it.
Gunne profile picture
Yep, they wanted to get rid of the metals business in 2018, 2 months after Corey Flaum, a former Scotia trader, got a notice of disciplinary action from Comex, which they settled, neither admitting or denying the rule violations.

In 2019, however, Flaum was charged by the Justice Department and he pleaded guilty. He is now cooperating with the ongoing investigation.

Scotia has been under review for at least a couple of years. It was previously scaled down, reportedly as a result of the legal tangles and its performance.

Steve in TN profile picture
Gold miner investments were set up for a correction. Just look at the GDX level above it's 200 day moving avg. You can see it was temporarily topping out. There were seven 15 to 20% corrections in the miners during '09 through '11 as they went similar levels over their 200 DMA. We're in one now.
The paper gold price suppression is cracking...
How will this effect world wide currencies?
Austrolib profile picture
Those currencies that do not go back on a gold standard will go to zero.
Green Jacket profile picture
Silver is the best bet at this time. This is the first time in history that Silver and Gold diverged. Silver will catch up soon. Of course gold will remain making new highs for the next couple of years. For gold to come down you have to convince thousands of investors around the world that the Fed did not print in the last 20 years nor will print in the next 10 at least. can you do that? mmmmmmmmmmmmmmm ..... I won't try myself.
Check out silver guys. It is standing on a powerful multiyear support and the cost of production is going up by the day. Silver is running behind because the money went to cryptos . Soon governments will ban cryptos because they cannot tax nor track the transactions. Its coming.
Good points!! Thanks
The physical price of silver is vastly different to its paper price. The GS ratio isn’t so crazy when it comes to physical.
The price of roos in Australia fluctuate also @kinroos .
I have been buying Euwax Gold II, which is a certificate for physical gold held in vaults of the Stuttgart (Germany) stock exchange. Costs you zero management fees (!!!) and you can e-mail them to arrange physical delivery in 100g gold bars for no additional charge. Any profits are also tax free if held for more than a year. Frankly, I don't know why they are offering this, they only charge the regular trading fees (16 Euro for buying 100g of Gold). Don't see how they make money with this product.
I would not recommend geared ETFs ir geared ETNs for consumer investors! The risk is high, and it is not meant for long-term holding, more for very short-term trades (days at most). And ETFs and ETNs with gearing go bankrupt regularly. If you want exposure gearing find a broker that offers trading via CFD (and even then, watch you total exposure carefully).
Blackmolly profile picture
I have AAAU. It is a low cost ETF with reserves held at the Perth mint and backed by the government of Western Australia.
I’m not sure I see the logic of holding a financial derivative for something that is supposed to be a safe store of value

Buy coins and bars instead
It’s a way for the big brokers to get our money, it’s Vegas on steroids only it makes paper gold control the price of physical gold. This is a way to hold gold down and keep it from being its own currency once again. This will have a terrible ending for the brokers one day, perhaps that day is here. What about derivatives?? When they fall huge banks fall hard and fast. Did that happen here?
Scarlo profile picture
You could buy the Sprott physical products on various exchanges, which would allow you to convert to physical. If you have less than the redemption minimum it should still retain value through the theory that you could aggregate shares with other holders.

The logic is that many folk need their non-retirement funds accessible for lifestyle expenses while they have idle cash in their IRA accounts.
Blackmolly profile picture
M63333 I have lots of gold bullion coins. The ETF holds it's value when the underlying asset is gold. The shares are redeemable in bullion. It's in my Roth, that's why I have it there.
Spitfire MK V profile picture
The cracks in this market manipulating banks metal business started earlier . The writing on the wall so to speak . I am looking for other dominoes to fall shortly as well . Not a big fan of ETF's , stick with quality in majors .
Q.Cap profile picture
I think a good entry point yesterday. 
I’ve played with JNUG, before it was catapulted into the floor thankfully. But even so, it’s playing with 🔥🔥
Long GDXJ for sometime. Rode it up to the high, then down, now back up. Safest leveraged play on the gold price for me.
I agree with the author, somethings got to give is this crazy market and it feels like it’s not far off.
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