THE WEEK AHEAD FOR GOLD AND SILVER / MACLEODFINANCE

The week ahead for gold and silver

Do not be surprised if the current consolidation continues into next week. But in my opinion, anyone but the shortest of short-term traders will be looking to add to positions.

MACLEODFINANCE

The underlying story is one of Chinese demand, driven by China’s public recognising two things: get out of the dollar (which they can’t do because of exchange controls), and buy gold and silver as the only games in town.

In the short term the bullion banks in London and on Comex have a problem. 

They are short without much prospect of covering. 

Therefore, they must encourage a reaction in prices to shake out weak hedge funds and other punters before they realise the game is really, truly, up.

Let’s quantify the gold shorts in Comex Swaps, comprised mainly of bullion bank trading desks. 

These are now record short.

If I was an average Swap dealer in a bullion bank, I’d be expecting my treasury department to call a crisis meeting at any moment. 

And if I have a short position in silver as well, then I’d be in serious trouble. 

For reference, the Swaps’ net short position in silver is a further $6.443 billion.

Of course, we don’t know what their position is in London. 

Some will be covered, likely to be spreading the paper risk around LBMA member banks with out of the money call options. 

But where bullion banks have fractionally backed unallocated account obligations, they will be extremely concerned.

In both contracts, hedge funds (managed money) don’t have extreme positions. 

This is silver:

Somewhat overbought, yes. 

But hedge funds are yet to wake up to what’s really going on in silver. 

And God help the Swaps if they do. 

The position in gold is similar.

The pecked line shows the average net long position since 2006. 

At 148,523 contracts net long, hedge fund interest is far from extreme.

The key to it is Chinese and East Asian demand. 

While we in Western capital markets are far from bullish (yet) the Chinese public are loaded up with cash in the form of bank deposits. And they have already cleaned us out of physical stock.

I expect a crisis in our paper markets to develop due to these factors alone. 

And this is independent of other considerations, nearly all of which are positive for gold and silver.