Minyan Mailbag: Gold to Break to Upside, Dollar to Collapse

Lance Lewis  Nov 13, 2008 3:05 pm

Minyan Mailbag: Gold to Break to Upside, Dollar to Collapse
 
Yellow metal one bright spot in current darkness.
 

 

Dear Prof. Lewis,

A client of mine tried to buy actual gold, and said there was so much demand it was almost impossible to buy. He also said they were charging a huge mark-up on the price.

So the question: How could there be so much "demand," and such a mark-up, while the SPDR Gold Shares and the price of gold are going down? Why that disconnect?



Given huge demand, it seems only a matter of time before small gold miners are scooped up -- eventually, they'll have to get the gold out of the ground..

Thanks for your thoughts,

Minyan Scott



Dear Minyan Scott,

SPDR Gold Shares (GLD) isn't selling gold. The only selling is in the paper market (i.e. the futures).


Click to enlarge


The physical market for gold continues to be tight and is getting tighter. In fact, the 3M Gold Forward Offered Rate (GOFO) fell another 13 basis points today to 0.20%, and one-month GOFO hit 0.07%.


Click to enlarge


When GOFO goes negative (which will likely happen tomorrow or early next week), then gold will be in backwardation, something that last happened after the Washington Agreement was announced in 1999 and there was a mad dash for physical gold by shorts.

I discussed this possibility in Mother of All Short Squeezes for Gold.

Unlike other commodities, gold very rarely goes into backwardation, and only when 1) the market fears a collapse in the currency, and/or 2) the market is worried about counterparties making good on their promise to deliver gold (which was briefly the case in 1999, when the Washington Agreement was announced and shorts were squeezed).

Rate this article:  (0 Votes)
Comments (10) See All Comments »
11-14-2008, 7:19 am
While the crash of the dollar is the logical outcome of the government's actions thus far, I am not convinced that it will come to this. Obviously the US will fight this with everything it's got. In addition, I'm not sure that the r
Read More
11-14-2008, 8:44 am
Lewis writes and re-writes the same gold bug article every week around here- maybe one day he'll actually be right like the broken clock.
Read More
11-14-2008, 10:06 am
With respect, Elias, some thoughts on timing. Prof. Lewis is usually a fundamental analyst; that school of analysis implies a trading method that is light on timing signals and long on patience. Recently, in noting supply issues in physical gold, h
Read More
11-14-2008, 5:56 pm
The only way to prop up the dollar is for people to buy them with other currencies. Where will they get the money, print it? Why not. Basically, the one who runs their money printing presses the fastest wins!

Frankly, with enough dollar
Read More
11-17-2008, 7:53 pm
I'll be posting this in a few areas...

Can anyone suggest some good web sites to trade futures (precious metals)? I'm not real happy with my current provider.

Thanks!

Read More
discuss this article and more on the mv exchange
Positions in gold and gold shares

Get real-time options trading ideas from Steve Smith, veteran options trader and newsletter author, plus let him show you the way to cut risk and boost your returns through the strategic use of options.  Click here for a free 14 day trial to OptionSmith by Steve Smith.



The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2009 Minyanville Media, Inc. All Rights Reserved.

Ticker Talk
Popular Tickers:
SPX »AMZN »RIMM »
Select
  •  
Talk Now
Share this Talk on your site:
Send us your feedback

Our Professors

rss article alert