Tuesday, July 2, 2013

John Hathaway - Five Absolutely Spectacular Gold Charts

"In our opinion, the severe pressure on gold prices since April 16, 2013 has been caused by a coordinated bear raid orchestrated by large bank trading desks and hedge funds.  The method used was naked shorting of gold contracts on the futures exchange (Comex), which means that physical gold was never sold, only paper.  Gold was rarely, if ever, delivered to a buyer.  Trades were settled in cash.

The notional amounts of the transactions on many days exceeded annual mine production, absurd on the face of it.  The motive was most likely to break the gold price for profit.  The result is that short positions of these traders are higher than at the bottom in 2008 (chart below), after which gold rallied 167% and mining shares 256% (basis XAU).
 
Traders exploited and exaggerated the technical vulnerability of gold in our opinion simply because it was possible to do so.  Because the gold futures market offers deeper capacity than almost any other physical commodity market, it was a perfect target for bonus seeking traders who have also profited (some of which are now being prosecuted or investigated) in the manipulation of Libor and Foreign Exchange rates.
 
The price decline in paper gold has been met with a surge in physical demand worldwide.  The most dramatic image is the disparity between paper and physical gold, which is depicted in the chart below showing the premiums over paper gold prices paid in China for physical.
 
While China is by far the larger market, U.S. coin sales are exceptionally strong as well, surpassing volume at the 2011 price peak by 23%.  The conclusion we draw is that the paper market has severely mispriced gold on the downside. The physical market indicates a shortage of gold at the same time the paper market is extremely short.
In April 2013, Dutch banking giant ABN Amro notified clients that they would no longer be providing physical delivery of precious metals including gold.  Claims would be settled in cash with account balances adjusted by the prevailing bid prices “offered by merchants.”????  The bank explained that new custodial relationships would no longer allow physical “extradition.”
 

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