The bullion banks are now in danger of being badly squeezed in the paper gold market. This is a very rare event but the set up for a major short squeeze in the paper gold market is now in place.
Swaps Are In Even Deeper Trouble
September 3 (King World News) – Alasdair Macleod: Tonight’s Commitment of Traders report shows the Swaps category (mostly bullion banks) are losing the battle to reduce their short positions.
Swaps Now Have A Staggering 80% Of Paper Gold Shorts!
Not only have their net shorts increased by 8,259 contracts, but with Producers/Merchants reducing their net shorts by 2,425 contracts, 80% of the short side is now with the Swaps. Regular readers of this analysis will be aware that under Basel 3, bullion bank trading desks are being encouraged to reduce their trading books as much as possible, but in defending their current position they are going even more short.
Meanwhile, Hedge funds have added 6,233 contracts to their net longs, taking their net position to 81,677 net long, which is still significantly below their long-term average net long position of 110,000. They could easily add another 100,000 contracts if they turn bullish. For the record, the next chart is of their net long position since 2006.
How the shorts will deal with an explosion of hedge fund bullishness when they are under the cosh to cut their positions is an open question.
The Other Reported category is now significantly larger than hedge funds, and they have been adding to their longs as well, which is up next.
All this is very uncomfortable for the bullion bank trading desks, and the money value of their gross and net shorts is our last chart.
Swaps In Danger Of Getting Squeezed
If Gold Surge Accelerates
At $47.6bn gross and $34.4bn net of longs, the attempt in early August to shake out weak longs has turned out to be a total failure. And that was before gold and silver jumped today on disappointing payroll figures, with only 235,000 jobs added, compared with forecasts of 725,000. That’s a huge miss.
Clearly, the US economy is stagnating badly at a time when official price inflation is running at 5.4%. The Fed still maintains that it is transitory, an excuse that’s wearing very thin. But it is the Fed’s worst nightmare: stagflation — by which is meant an economy that has price inflation while activity stagnates.
And this is the point which everyone must realise: real yields are now deeply negative, and with price inflation likely to rise even more, gold and silver are now in an enormous backwardation in dollar terms of at least 5.4% and rising, without taking into account the natural interest rate a lender of gold earns, which without counterparty risk (i.e. that you might not get your gold back) is probably a further 0.5%.
Bullion bank traders, be very frightened!
***ALSO JUST RELEASED: Gold Surges $22 Close To Major Upside Breakout On Booming Physical Demand As Silver Attacks $25 Level, Plus More Inflation Surprises CLICK HERE.
***ALSO JUST RELEASED: When This Bubble Bursts There Will Be Hell To Pay, Plus A Look At How To Protect Yourself CLICK HERE.
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