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Turk: “We are seeing some extraordinary events in the gold market, Eric.  One of these was yesterday's London PM fix, which people are still talking about.  Gold was trading quietly around $1385 just before the fix.  Then, as the fix commenced, gold rose within roughly 15 minutes to $1414. 

It was a real rocket-shot and caught the shorts by surprise.  But the shorts regrouped, in order to regain control, and gold then dropped lower in the next 30 minutes.  After the fix ended, gold had fallen to below $1370.  We have to consider the significance of this extraordinary event....

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“The London PM fix, which takes place every business day at 3 PM London time, is one of the most important daily events in gold.  It occurs when both the London and North American markets are open, so it has deep liquidity.

The London fix is widely misunderstood because of its name, but if you view it in a nautical sense, to 'fix' on a distant point, the term makes sense.  What the fix aims to do is discover the price at which buyers and sellers of physical ‘London Good Delivery’ bars are in balance.  The dealers keep offering bars for sale or bidding on bars for purchase until there is a balance between them in order to clear the market, which is why yesterday's fix was so significant, Eric.

Normally the institutions and other big players in the market can get 400-ounce gold bars delivered to them within 2 days after payment, typically called T+2.  These two days enable the seller of gold to make sure he has received good funds because he is converting hard money - physical gold - into soft money, namely, the national currency the seller accepts in payment.  The currency is usually dollars, but sometimes pounds are used.  Soft currencies may be repudiated because banks can reverse wire transfers, which explains the caution the seller requires before releasing the bars.

In the days leading up to the fix, some of the larger orders to buy bars have been moving out to as long as T+5, which is extraordinary.  These orders, typically 3-to-5 tons in size, are normally handled with no problem.  So to see this lengthy delay in delivery - which is very rare - shows how tight the physical market for gold really is.

Different markets reflect the tightness in physical metal in different ways.  For example, India and Shanghai reflect the tightness with huge premiums.  Futures contracts reflect the tightness by moving into backwardation, but the true extent of the current backwardation between May and June is being distorted by manipulating interest rates. 

But in London, the tightness cannot be distorted or hidden.  We can see the tightness by the shorts delaying delivery, which is happening right now.  So it is clear that the buyer or buyers who pushed the gold price up during the London PM fix yesterday were obviously desperate to get their hands on physical metal and were prepared to pay whatever price it took to obtain it.

The huge premiums over spot in Asia and the long delivery times in London clearly show that this takedown in gold over the past few weeks was all about what was taking place in the paper market.  The same is true for silver, which looks like it had a selling climax on Monday, given the huge upside reversal in its price that day along with gold.  Gold's reversal wasn't as spectacular as silver, but nevertheless it was a solid performance.

There is an old saying that market prices can appear irrational longer than one can stay solvent.  It is one reason I do not recommend trading markets or using leverage, but instead focus on accumulating undervalued assets that are paid for in full.  For the past few weeks, and even now, the precious metals are being given away at bargain basement prices because traders of paper metal have forced the gold price lower by their relentless selling of gold's various derivative instruments.

The hedge funds in particular have been piling on and now have a record short position.  Maybe they foolishly believe that gold's 5,000-year history as money ends here.  The only thing about to end is the hedge fund short positions as the gold and silver prices look ready to blast off from current levels.  KWN readers should expect a major upside move that will panic these hedge funds out of their short positions.  In other words, the physical market is about to take down the paper traders who are massively overexposed on the short side.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The audio interviews with Jim Grant, Michael Pento, Egon von Greyerz, Andrew Maguire, Art Cashin, William Kaye, James Turk, John Hathaway, Dr. Paul Craig Roberts, and MEP Nigel Farage are available now.  Also, be sure to hear the other recent KWN interviews which include Eric Sprott, Marc Faber and Felix Zulauf by CLICKING HERE.

Eric King

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