Earlier today, Bloomberg announced that bearish bets on Gold are reaching record highs (source). While that is completely true it is exactly 50% of the story. Based on the weekly Commitment of Traders reports it appears that the spread between the short positions of speculators and the long positions of commercials have reached a historic high as well. The divergence started in November 2012, as one could clearly see in the following chart indicated in the red area (our emphasis). For the writers at Bloomberg it was apparently the most convenient thing to highlight the short positions instead of talking about the divergence. It would have taken only the following chart to bring the full story and truth. John Rubino rightfully points to the abuse of mainstream media to paint a desired picture.
The above chart shows the open interest in gold on the cutoff on Tuesday May 14th. What we know for sure is that the short bets have become too crowded, making inverse reactions not only likely but also violent. Just moments ago the gold and silver price moved vertically up. That’s the inverse of the movements we have been used to see starting December 2012, i.e. since the announcement of QE4 (read more about the mysteries in the gold market).
Zerohedge points to rumours of a potential US downgrade from Moody’s. Bloomberg indeed announced that “US policy makers must address debt loads projected to rise later this decade to avoid a 2013 downgrade according to Moody’s Investors Service”. RT adds to it that America’s ticking debt bomb has been reset. “Washington has suspended the debt ceiling, setting a date, and not a concrete dollar sum as a deadline, an unprecedented first in US history.”
While that could have been the trigger it is clear that “under the hood” the dynamics of short covering are at play. Too many bets were made on the short side; the trade became overcrowded.
The move higher comes after a very suspicious spike this night in which the silver price was pushed 10% lower within the first hour of Asian trading (with a bank holiday in Europe). Gold and silver did recover quite fast and remained somehow flat … until some minutes ago. The following charts show the price action in today’s trading sessions. In our own words: folly of the highest degree, or the metals being subject to greediness of traders. Readers can judge themselves.
Only today, the highs and lows for each of the metal:
- The gold price briefly touched $1,336 and peaked at $1,400, which is almost 5% from low to high
- The silver price briefly touched $20.20 and peaked at $23.20, which is 15% from low to high
Looking at what is happening in the precious metals markets lately we can only underline the importance of holding the metal in physical form. We wrote about that in great detail in Gold – You better hold it. The forces that are driving the paper market (i.e. derivatives and the fractional metals market) and the physical market are simply too diverse. People seeking monetary safety in the metal have really different motives than traders or speculators. At least, bullion owners should be aware of that. It should help them understand the price spectacle on days like these.
Let us repeat the fundamental idea of the precious metals again: you hold them because of their monetary protection!