Potentially explosive situation in the gold market.

Disclaimer: I am not a gold bug, nor do I think gold is money or any other kind of nonsense like that. However, I am a trader and when I see a potentially explosive situation like the one in gold right now I have to act on it.

Newsflash: Gold producers (a.k.a. "commercials" in the parlance of futures trading) are massively, massively, over-hedged (short) gold right now.

I started looking at Comex warehouse stocks of gold. You can get it here at this link.

You will see that there is a total of 8.6 million ounces of gold in Comex warehouses. That's equivalent to 86,000 contracts of gold. (Each contract being 100 ounces.)

The problem is, commercials are short 157,000 contracts of gold and "net short" 140,000 contracts. That means there's only enough physical gold to "cover" about 62% of their position.

It also means the market is unbelievably vulnerable to a "squeeze" if someone big enough were to undertake it and it wouldn't take much. Purchasing 50,000 contracts of gold would cost roughly $61 million. (Or, much less, on margin). Any big hedge fund could do that easily. That would put the commercials in a position where they would be unable to cover their shorts with the amount of physical gold on hand.

Too bad I wasn't running a big hedge fund. It would be fun to put the squeeze on these guys.

And by the way, why are the commercials so short, anyway? You look at the gold "curve" and a hedge one year out (long spot, short futures one year out) yields you a whopping 1.3%. That's equal to a one-year T-Bill when you account for storage and other costs. Why bother?

Yet they call these guys "smart money?" They're idiots. I can run a better gold mining operation.

This situation can't last. I remember the last time producers were so heavily hedged (short). That was in the mid-1990s when they were selling like mad at $265 an ounce. What happened after? Gold ran up nearly $1700 an ounce.

End of an era...CME Group closing down trading floors. I'm glad I got to experience it in its heyday.

Last week the CME Group announced that it was closing down its trading floors. When I heard the news I became a little bit sad and nostaligic. Although I knew it was just a matter of time, it was still personal for me because I spent ten years in the 80s early 90s trading in the "pits" on the floors of four exchanges: CME, NYMEX, COMEX and NYFE. I was lucky, I got to experience the wild world of open outcry trading. It was an experience I wouldn't give up for anything. I have so many stories I could tell. There were so many characters, many of them quite colorful.

In the past year I have been taping my webcast for Hard Assets Investor at the CME Group in New York, which was formerly the NYMEX. To put it mildly there's not much going on there anymore. You basically walk into a cavernous room, somewhat dark, with an arrangement of trading pits that are sparsely occupied. It's so quiet you can practically hear a pin drop. (More likely a computer hard drive humming.) It's ironic because some of these spaces used to hold records for largest indoor, unsupported structural rooms in the world. Like the CME in Chicago, for example, where I traded S&P's from 1991-1993.

The activity used to be insane. Large pits filled with NFL-sized traders, standing shoulder to shoulder, screaming, waving arms and hands, cursing, spitting, flinging pens and sometimes fighting. It was wild. To the casual observer it looked like sheer chaos, yet out of that chaos came incredibly ordered price setting for commodities and financial instruments that were bought and sold all over the world. Literally trillions of dollars in global capital flew through these pits every year. What an experience it was.

The CME's decsion I'm sure is an economic one: only something like one-tenth of one percent of their volume is done open outcry nowadays. The rest of it, which means pretty much ALL of it is done via computer.

I remember back in 1991 when I was going through membership on the CME, we had to take a week-long course. At the end of that course the instructor took us all into a back room where we saw a bunch of green screen computer terminals sitting on desks. That's when he said to us, "This is called, Globex, our electronic trading system. One day we will be doing the majority of our trading over this system."

We all laughed, as if to say, "Yeah, like that's ever going to happen."

As optimistic as CME officials were back then I don't think any of them dreamed that electronic trading and the technology behind it would change the industry as it has, literally bringing about the end of a 150-year old tradition of open outcry.

Next up, I'm sure is the NYSE. Maybe not next week or next year, but that day is coming and for many people it will be even harder to accept. That's because if there's one ultimate symbol of global finance capitalism it's probably the New York Stock Exchange. And when they close it some real estate developer will probably turn it into expensive condos for billionaires. (Trump?)

Anyway, goodbye floor, it's been fun.

Maybe one day I'll give a seminar and talk about all the crazy times and the people.