Thursday, July 6, 2017

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.

1 comment:

Andrew Anderson said...

Gold ran up nearly $1700 an ounce. Mike Norman

The Fed should never buy private assets and that includes anyone's favorite shiny metals.

So a good run up in the price of gold would be a good opportunity to finance an equal fiat distribution to all US citizens by selling what gold the Fed owns and, of course, never buying it back.