Today James Turk told King World News that a massive short squeeze is about to send the price of gold soaring.
Major Problems For Gold Shorts
James Turk: “Gold’s end-of-month option expiry week is now behind us, Eric, and there are some important developments from last week that I would like to share with KWN readers…
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First, despite all the pushing and shoving of the gold price last week, it only dropped 90¢ by Friday’s close. That is an impressive performance. Silver actually closed up 51¢ for the week, which I will get to in a moment, after we cover gold.
Second, gold came out unscathed from the battle on Friday, which was also the end of the quarter. We often see quarter-end window dressing by the price manipulators because a low price makes the losses on their short positions look more palatable. But that gambit didn’t work for them the way it used to.
On Friday gold was pushed all the way down to $1,240 during thin Asian trading, which was a perfect set up to scare and shake-out weak-handed longs, and also to get as many call options as possible to expire out of the money. But buyers appeared at that $1,240 level.
“The Selling…Was Hit By A Wave Of Buying”
They then tried a second time to push gold under $1240 when New York opened. But the selling in the paper market by the price manipulators was hit by a wave of buying. The buying continued throughout Friday, and gold actually closed near the highs for the day, up $2.30 from the day before. It was another sign of real strength. To back this up, here is the third point I want to make about gold, which provides some solid evidence that I find quite amazing.
There is a little-known feature offered by the Comex called EFPs, which is short-hand for Exchange of Futures for Physicals. These are transactions in which a Comex futures contract is exchanged for an offsetting position in the physical market. These transactions are done off the Comex in privately negotiated deals.
Here’s an example of how it normally works. Let’s assume you want to take delivery of an April futures contract, and the firm that sold you the contract doesn’t have the metal in the Comex vaults. So the short calls you up and agrees to deliver the metal to you in another vault, at a price and on the terms the two of you negotiate.
Given that the short does not want a failure to deliver, the short will often make a concession in the price or offer other favorable terms to get the long to accept. Now let’s look at what happened last week. The following table shows the EFP transactions on the Comex.
First, this EFP activity explains why open interest dropped by 45,471 contracts last week. With that kind of selling pressure, why didn’t the price manipulators drive gold below $1,240? It’s because the open interest did not disappear from selling by weak longs. Rather it disappeared because the longs are strong hands who took delivery – or promises to deliver in the future – through EFPs. The 35,843 EFPs last week were a staggering 79% of the open interest decline.
Paper Shorts Are Scrambling
But here is what I find really astonishing, Eric. Look at all the June EFPs. And look at how the April EFPs were declining over the week while the June EFPs were rising. It means that the shorts were unable to deliver on the April contracts, which would have required delivering the metal last week, before the last April contracts expired. The shorts didn’t have the metal, so instead they promised the longs to deliver in June, no doubt with price concessions to the longs to sweeten the deal to get the longs to accept the risk of waiting two more months for delivery.
Here’s another point worth thinking about. In normal markets the shorts who are obligated to deliver physical metal do so as soon as possible at the beginning of the delivery month for two reasons. First, by delivering metal on the first day, they don’t pay storage charges for the rest of the month. Second, the sooner they deliver, the sooner they get paid for the metal they are selling.
It used to be that EFPs were mainly used to sort out a small number of positions at month end, but last week’s EFP volume was huge. It was 111 tonnes, which is about two weeks of annual production. That is a huge volume, and the fact that this activity is taking place at the end of the month means the shorts are trying to put off delivery as long as possible because they don’t have metal.
I need to bring in here a word of caution, Eric, to keep our mind from imagining what could unfold in the weeks and months ahead. Using Comex data is like trying to figure out what an elephant looks like by just grabbing a foot. There may be other interpretations of this EFP data, which is only giving us a brief, limited look under the hood of the bullion dealers.
Gold Market Set Up For A Mammoth Short Squeeze
But if my interpretation is correct, gold is getting set up for a potentially mammoth short squeeze. My interpretation of this data is that the shorts are stuck. They were not able to deliver everything the longs wanted. So the shorts did the best they could under the circumstances. Unable to deliver, they rolled their short positions forward.
So the demand for physical gold by strong hands who want to buy in size is outstripping available metal, which ties into one of the key points in your excellent interview with Andrew Maguire this weekend. Could these strong hands be the sovereign buyers that Andrew referred to?
This EFP activity also ties into another point Andrew made in his interview. The gold price in the physical market is increasingly being set in China, the rest of Asia and the Middle East. Consequently, the power of the gold price manipulators who use paper is diminishing. The manipulators are fighting this loss of power by trying to delay the delivery of the physical gold they are obligated to deliver. They are between a rock and a hard place.
Either Way The Gold Price Soars
They either fail to deliver, which will send the price of gold soaring as people everywhere move out of paper representations of gold into physical metal, or they cover their shorts by buying physical metal in a tight market already starved of physical metal, which would also send the price of gold soaring.
I’ve mentioned before that one of these days leading into option expiry, the delta-hedgers are going to be forced to scramble for cover. We are getting closer to that moment, so we need to start thinking about June contracts expiring at the end of May. The clue will be to watch how the spot price compares to June delivery and whether a deep backwardation develops, which brings me back to silver.
Possible Silver Short Squeeze As Well
As if all of this about gold wasn’t bullish enough, there is the obvious strength in silver. The shorts can’t get it below $18. It is solid as a rock, so we may see a short squeeze in silver when the May futures go to first notice day and the May options expire at the end of this month.
***The KWN audio interview with Andrew Maguire has now been released and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
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