Today James Turk told King World News that the gold and silver shorts took a big gamble and might lose their ass.
“The Shorts Are Stuck”
James Turk: “I think the precious metal markets are going to get very interesting over the next few weeks, Eric…
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James Turk continues: “You will recall our discussion a few weeks ago, just after the April gold options expired, about Exchange of Futures for Physicals (“EFPs”). I noted back then the abnormal EFP activity that had occurred and said:
“If my interpretation is correct, gold is getting set up for a potentially mammoth short squeeze” (when the June gold option contracts expire at the end of May). I went on to add that “the shorts are stuck.”
It is this event – a potential short squeeze – that could make the next few weeks so interesting. But I have to explain what I mean by “short.” When trading gold, it is possible to be “short” in two different ways. The common use of the term “short” means that you sold something you don’t have and can therefore lose money when the price rises as you buy to cover your position. One can be badly injured financially by getting caught short in this way.
But there is another way to be short gold that is worse than being injured. It can kill you financially when you are obligated to deliver physical gold and you don’t have it and can’t buy it, which is the kind of short squeeze I am talking about. It used to be that all types of derivative contracts for gold and silver enabled physical delivery. So, for example, if you were long a gold futures contract and asked for physical delivery, the short was required to deliver metal to you.
This Scheme Has Worked For Years…
In recent decades a new type of derivative began trading. These allowed cash settlement. In other words, no metal crossed hands when the derivative contract expired. The losing side of the contract simply paid cash to the winning side, which, along with the high degree of leverage that is allowed, has turned precious metals trading into a gambling casino. But it did more than that. Cash settlement of derivative contracts made it easy for governments to cap the gold price. They could sell all the derivatives they wanted in order to depress the gold price knowing that they would not have to deliver metal. Instead they could get their central banks to simply print up some cash. This scheme has worked for years.
But We Are Now Close To A Tipping Point
In the early part of this century when there were relatively few cash settled derivatives, central banks were forced to accept the reality that the debasement of their currencies would lead to higher gold price, and it did. Gold rose twelve years in a row from 2000 to 2012. I used to call it a “managed retreat” by central banks. Since then, as cash settlement derivatives became more widely available and accepted, we all know how tough it has been for gold bulls. But it now looks like we are very close to the tipping point.
What seems clear is that governments are now carrying an offside short position that has accumulated to massive proportions. By that I mean their position has become so large, they are unable to cover on those contracts that still enable delivery of physical metal like Comex futures. When you buy a Comex futures contract, you have the right to take delivery of physical metal, and that is where the ‘offside’ point arises. What I am saying here is that EFPs are being used to try juggling what has become an unmanageable position and commitment to deliver physical metal.
There are no doubt a lot of games being played with EFPs and other off-exchange private contracts, particularly with both precious metals in backwardation. You can’t see this backwardation on the Comex because spreads there are artificial and crafted and published in end-of-day settlement prices to paint the tape. Unfortunately, we don’t know much about these transactions because they are off-exchange. So we don’t know anything about the terms by which they are concluded. My sense of it is that the shorts are massively offside and struggling to keep their head above water because the longs want delivery for metal the shorts don’t have.
The Shorts Took A Big Gamble And May Lose Their Ass
This struggle has resulted in the abnormally high EFP activity. The shorts have used EFPs to move their position off the exchange so that governments can settle contracts with cash instead of metal. The size of this imbalance is growing, not shrinking, Eric. I think the shorts took a big gamble with this latest engineered takedown of metal prices over the past few weeks. They were probably hoping to shake out weak hands holding physical metal, but it hasn’t worked. After six years of depressed metal prices since the 2011 peaks, everyone still left in the market is a believer. And with the growing recognition that gold is exceptionally undervalued, more buyers of physical metal are entering the market.
Is The Game Finally Over?
The upshot of this Eric, is that physical metal today is in strong hands. Every weak hand who could be flushed out of their position has been flushed out. So we are at crunch time for the shorts because they don’t have the physical metal they are being asked to deliver, and they have juggled their short position to the point where it is becoming unmanageable. So is the game finally over for governments capping the gold price? We’ll soon find out the answer to that question.”
KWN has just released one of Bill Fleckenstein’s greatest audio interviews ever and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***KWN has already released the fascinating audio interview with Rick Rule discussing stock picks for gold, silver, and uranium, as well as the big picture for the gold and silver markets and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***ALSO JUST RELEASED: John Embry: The Cracks Are Showing Everywhere In The Global Financial System CLICK HERE.
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