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.

Bear Hug for Gold?


If investment demand drives price, markets could get a short squeeze.


I've read some things written by gold bears of late, calling for gold to decline in March due to "seasonal tendencies."

As always with statistics, if one doesn't know why a particular statistical pattern occurs (as with the "Super Bowl Indicator" for example), one can make incorrect assumptions about future behavior.

In gold's case, it's typical seasonality tends to see gold rally in the fall, and then peak in the early spring. But the reason that we typically see this pattern, is due to the seasonality of gold demand coming from the largest gold jewelry consumer on the planet, whose various festivals revolve around gold: India.

However, as I've pointed out before, jewelry demand is not what is currently driving the gold price. Indian gold imports in February were virtually 0. Meanwhile, gold rallied $100 during February to $1000 and an 11-month high. As always occurs during a big bull market in gold, investment demand is the primary driver of the gold market, and it displaces jewelry demand. And investment demand is obviously not seasonal.

Thus, those expecting gold to follow the usual seasonal patterns may be in for a surprise. As I discussed in Countdown to the Gold Rally, the $100 decline from gold's peak of 10 days ago, was driven by an unusually high amount of short selling. I suspect this was based on the premise that the decline in Indian demand in February (and the "seasonal pattern") were predicting gold demand would wane, and lead to a decline.

If I'm correct, however, in my belief that investment demand is now the primary driver of the gold price (and not jewelry demand), then the gold market is set up for a vicious short squeeze. That squeeze could be augmented even further if the dollar declines sharply in the next few weeks, which gold -- as well as silver, platinum, and many other commodities -- appears to have been anticipating all along, with its rally since mid-December 2008 in the face of a rising dollar.

Meanwhile, the gold shorts continued to add to levered positions in the 2-times short gold ETFs this week - which short the COMEX futures to keep up their levered exposure. See the charts of the shares outstanding of both ETFs below, which have exploded over the past few weeks as more and more bears have piled into these 2-times short ETFs, and pushed up COMEX gold open interest over the past 10 days - even as the price has declined.

Click to enlarge

Click to enlarge

The shorts are even aggressively shorting the GLD ETF too, which we can see in the following chart of short interest in the GLD.

Click to enlarge

Nevertheless, the GLD gold ETF (whose 150 tonnes of gold demand in February played a big role in pushing the gold price higher), hasn't seen its shares outstanding, fall by a single share (see the chart below). This means it hasn't sold a single ounce of gold since that $1000 peak in late February, either. Thus, anyone believing that the recent February rally in gold and the demand for the ETF was "retail" -- or merely, "fast money" -- has to seriously question that belief. The action in GLD thus far is, in fact, the classic definition of "strong hands" that don't react to price weakness by selling.

Click to enlarge

With gold having finally turned up yesterday -- and having added to those gains again today following the prior 8 straight days of heavy selling by shorts -- my bet is that the gold bears may be in for a big surprise. But as always, we shall see.

< 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