Now for the bull market…

The bullion bank establishment is adjusting to gold and silver going far higher, which is why they are deleveraging their balance sheets. It is a process in its early stages.

In a wild week, gold hit new highs before correcting modestly yesterday (Thursday). In European trading this morning it was $2865, up $68 from last Friday’s close. Comex’s active contract was at a 3% premium annualised over spot. Silver was $32.26, up 90 cents on the same timescale. Its active contract was trading at an annualised 5.7% premium over spot. Comex turnover in gold was subdued, while in silver it was healthy.

Unusually, as gold was hitting new highs Comex Open Interest declined since 24 January, when in these bullish conditions one would expect it to increase. This can only be because shorts are being squeezed. Stand-for-deliveries continued apace, with 50,465 gold contracts (157 tonnes) in the last five trading sessions, and 2,747 silver contracts (427 tonnes) recorded.

These are remarkable, market-busting numbers.

Comex premiums, which have driven the arbitrage whereby gold has been airfreighted to New York in substantial quantities have subsided. But the increased pace of futures encashment for physical evidenced by stand-for-deliveries is irrefutable evidence that the paper market is being undermined by a flight into bullion. Given that the expansion of paper has diverted demand from bullion in the past, and that the bullion banks which offer unallocated accounts in London almost certainly are technically short, it would appear that the days of unbacked credit determining the spot gold price are drawing to a close.

The bear-closing in gold is an indication perhaps of bullion bank traders imposing strict limits on their shorts — we will only be able toquantify this with hindsight from Commitment of Traders reports. But this being the case, both gold and silver prices in future will reflect a tendency to be marked up to deter buyers. More normal bull market conditions, already evident in silver futures’ trading, can be expected to return to gold. 

In this context, the next chart illustrates gold’s technical position:

This chart is clearly bullish. Gold has entered an acceleration phase, where the price is being driven by improving sentiment catching market participants off-guard. Western investment portfolios are severely underweight, owning almost no gold and minimal related investments. For them, this is where the future investment action will be and they will be looking to increase their exposure through bullion-backed ETFs, bullion itself, and mining stocks.

Rarely in markets do we see a bull market repeatedly hitting new high ground when the vast majority of market participants are yet to buy. But they can no longer ignore gold’s credentials.

In credit terms, I should point out that collapsing values of paper currencies are driving gold prices, illustrated next. It is a point which is not yet understood beyond a very small number of strategic thinkers predominantly in Russia, China, and selected central banks.

Lastly, to paraphrase President Trump silver is the most beautiful word, if its chart is anything to go by.

Having back tested the top of a four-year consolidation (the pecked line) and with both moving averages acting as a springboard, silver has the makings of gold on steroids.