Gold trader and whistleblower, Andrew Maguire, based in London, was interviewed on May 19 and seriously questioned the bear market in gold. He argued persuasively that gold, at least physical gold, is really in a bull market. His argument reflects my belief that the physical gold market is a true market affected by supply and demand, while the paper market has been a casino of sorts unrelated to anything in the real world.
Maguire said, "You cannot have a bear market when even the initially reported physical demand is surging to its highest level in 18 months." On top of this official data, is significantly increased wholesale demand for the yellow metal.
Maguire further argued, "You cannot call a bear market when you see $30 premiums in Shanghai, India and Middle Eastern markets. You cannot call it a bear market when we see extended and increasing delivery bottlenecks."
Bullion banks are offering cash settlements to depositors for their gold, instead of going out and just buying the gold to deliver. There is also a delay for delivery of purchases of physical gold, up to 3 weeks in some cases.
With such indicators of a bear market, he rhetorically asked, "If this is a bear market, what is a bull market?"
Certainly prices keep falling in the paper gold market, as last Friday marked another major series of drops for gold prices. As I have argued, the two markets have become almost entirely disconnected.
The divergence between paper and physical gold is only widening. Maguire recalled that the divergence was happening even before the April 12 paper market crash. March marked the beginning of the official intervention in the paper gold market, and then the Cyprus crisis happened and people raced to turn their paper gold into physical gold and take delivery. Maguire reported that hundreds of tons of gold have been entering Asian markets since March and April. With prices now even lower, the outflow to Asia is just accelerating. Some 300 tons of paper gold has been redeemed out of GLD, the paper holdings, alone.
As Maguire has argued, and I agree, "This bear market is 100 percent in the paper market."
How long can this divergence between the paper and physical markets last? Not long.
Maguire argued that managed funds still have large short positions, and they have been rolling these positions into ever larger positions as gold has fallen by actively adding shorts to defend the lower price levels. Bullion banks are taking the long side of these short positions. When the market turns, there will be a race to cover all the short positions and gold could explode to the upside.
Maguire said, "I firmly believe the bottom is in…Anything below 1350 is going to create massive central bank demand."
Maguire warned that the bullion banks are never wrong and they are currently positioned for a large more higher in gold. Our technical analysis supports his fundamental analysis, which points to this being an excellent time to invest in gold. The bottom is near or may have already been hit and when the paper and physical markets realign, the paper market price should skyrocket.
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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGOL, AGQ, DGL, DGLD, DGP, DGZ, DZZ, GLD, GLL, IAU, PHYS, SGOL, UBG, UGL, UGLD over the next 72 hours. 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.
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