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Stock Market Strategy & Precious Metals Outlook

Comic Relief For Market Mayhem


Gold prices hit a new high of $1,877.88 this morning and all I hear on CNBC are the top callers and naysayers. It seems obvious to everyone Gold prices are way overpriced, “At least a $200 risk premium” says the fund manager who has been wrong on Gold all the way up but somehow now can pinpoint the exact amount of Gold price appreciation attributable to risk. Can anyone else see the humor in this sorry excuse for market commentary? How about the absolute fraud of a financial adviser who yesterday stated unequivocally Gold prices had to go down because demand for jewelry was down. I will pause now in my writing  to allow you to regain your breath and wipe the tears from your eyes after the unavoidable belly laugh that no doubt just took over your body…..

….Are you up from the floor yet? I feel it would be almost wrong to even address the infantile ‘jewelry’ comment because I don’t want to offend my readers who understand the true dynamics of this historic Gold surge. Laying into this moronic and lost soul of a financial adviser would be like a bear attacking a bunny. Its just too easy and wrong.

Suffice it to say, Gold prices have leapt  over 12.5% in the last 10 trading days because the currency wars we have been writing about in this blog for the last 5 years are in full swing. We have been explaining in detail, for the last five years, western central banks have embarked on a King Lear like journey to devalue and debase paper currency. In this type of world the go to store of value is and will continue to be Gold and Silver.

Meanwhile, to add fuel to the inferno that is higher precious metals prices, the despotic ruler of Venezuela has demanded the return of all foreign held Venezuelan Gold….

As Chavez Pulls Venezuela’s Gold From JP Morgan, Is The Great Scramble For Physical Starting?

In addition to the nationalization of his gold insutry, Chavez earlier also announced that he would recover virtually all gold that Venezuela hold abroad, starting with 99 tons of gold at the Bank of England. As the WSJ reported earlier, “The Bank of England recently received a request from the Venezuelan government about transferring the 99 tons of gold Venezuela holds in the bank back to Venezuela, said a person familiar with the matter. A spokesman from the Bank of England declined to comment whether Venezuela had any gold on deposit at the bank.” That’s great, but not really a gamechanger. After all the BOE should have said gold. What could well be a gamechanger is that according to an update from Bloomberg, Venezuela has gold with, you guessed it, JP Morgan, Barclays, and Bank Of Nova Scotia. As most know, JPM is one of the 5 vault banks. The fun begins if Chavez demands physical delivery of more than 10.6 tons of physical because as today’s CME update of metal depository statistics, JPM only has 338,303 ounces of registered gold in storage. Or roughly 10.6 tons. A modest deposit of this size would cause some serious white hair at JPM as the bank scrambles to find the replacement gold, which has already been pledged about 100 times across the various paper markets. Keep an eye on gold in the illiquid after hour market. The overdue scramble for delivery may be about to begin.

…This demand in a world already dealing with tight Gold supply has led to the rare occurrence of backwardation in the Gold trading pit. GoldCore writes….

Perfect Storm Sees Gold & Silver Surge – Chavez Gold Action Leads to Backwardation, Short Squeeze and ‘Havoc’ Concerns

All major currencies have fallen sharply against gold and silver again today with gold reaching new record nominal highs in Canadian and New Zealand dollars, in sterling, in euros and of course in dollars as turmoil continues in global markets….

Markets continue to assess the ramifications of Venezuela deciding to repatriate their large gold reserves from London to Caracas. Their reserves are large in gold tonnage terms but small in dollar terms.Venezuela’s central bank is the world’s 15th largest holder of gold, with 365.8 tonnes, of which some 211 tonnes, worth $12.3bn are held in London with the Bank of England and JP Morgan, Barclays, and Bank Of Nova Scotia. Many analysts and the Gold Anti-Trust Action Committee (OTCPK:GATA) have long contended that much of the central bank gold reserves have been leased out by bullion banks and that in the event of central banks choosing to repatriate their bullion, significant supply issues could develop which would lead to a short squeeze and a parabolic increases in prices. The concern is that other central banks concerned about dollar and currency debasement and expropriation of their gold reserves by embattled large debtor sovereign nations may follow suit. A short squeeze is quite likely given the scale of global investor and central bank demand….

Already, there is a small degree of backwardation developing in the gold market with certain near term futures contracts now trading at higher prices than longer term contracts. The near term August ’11 contract was trading at $1,871.40/oz while June ’12 contract is trading at $1,870/oz (12:16 GMT). The spread between spot and longer term contracts has fallen suggesting that gold may soon join silver in backwardation. Silver has been in backwardation for seven months now and backwardation appears to be deepening again. This morning the September ‘11 contract is trading at $41.41 while December ‘12 is trading at $40.65. The possibility of backwardation in gold suggests that major investors are concerned about the supply of physical gold. Buyers are concerned about securing supply in the future and are willing to pay a premium for spot or immediate delivery. It could indicate that the short squeeze anticipated by many is taking place and we could see a sharp upward move in gold prices….

This would not be surprising considering the very small size of the physical bullion markets versus the size of the overall financial and currency markets and considering the high demand coming from investors and central banks globally. It is worth remembering what happened when silver went into backwardation some months ago. It led to a price surge from $30/oz to over $50/oz in 10 weeks.Backwardation rarely happens in the gold and silver bullion markets. Since gold futures first started to be traded in 1972 (on the Winnipeg Commodity Exchange), there have only been momentary backwardations of a few hours. It suggests that larger gold bars are difficult to acquire in volume and that the physical market is becoming stressed and less liquid. Backwardation can end in default, failure to make delivery and in sharply higher prices. A default on the COMEX would have important ramifications for the dollar and could see sharp selling of the dollar and sharp falls on global markets.

…My congratulations to those of you who already have significant portfolio exposure to the precious metals. For those of you who don’t I say,‘Fortune Favors the Bold’ Join us….