Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Countdown to the Gold Rally


Short squeeze could happen in the coming days.

I've been discussing the enormous short position that has been building in gold over the past 7 straight days of its decline, but you might be wondering why these bears are so anxious to short gold. And that's a valid question.

As far as I can tell, the bears are betting against gold based on a combination of the rising dollar index (i.e. - a belief in dollar-based "deflation"), and the fact that jewelry demand has contracted all over the world (which they think is meaningful).

For example, bears like to cite the fact that India (which is the world's largest importer of gold for jewelry) imported virtually no gold in February, which is a fact. What these bears fail to appreciate, however, is that jewelry demand for gold always collapses during a big bull market in gold, because big gold bull markets are driven by investment demand.

This displaces jewelry demand -- just as we've seen with the recent 150 tonnes of metal that the GLD ETF sucked down in February -- and an ounce hasn't sold during this decline. The same goes for silver.

This investment demand is why gold rose during February, despite dismal demand from India and weak jewelry demand globally. And the GLD ETF is obviously not representative of all the investment demand for gold globally, either, because there's more demand coming from investors that don't buy their metal through the GLD ETF.

This is where the bears are making a big mistake by shorting gold, in my view, and it should result in an epic short squeeze in the yellow metal at some point here soon.

In the meantime, if nothing else, this recent 7-day decline in gold has finally(hopefully) shattered the recent notion that gold is a bet on a decline in the stock market - which it never was and never will be. Gold is an investment in one thing and one thing only. It's a hedge against debasement of one's currency and the inflation that inevitably results from that debasement, because gold is a store of value (i.e., money) - just as it has been for thousands of years.

If gold can simply break the downside momentum and manage a rally today, we should see the squeeze begin in the coming days. If not, then it will be "day 8."

< Previous
  • 1
Next >
No positions in stocks mentioned.

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 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos