With the war in gold continuing to rage, today one of the most respected veterans in the gold world told King World News that on the heels of the recent rally gold has now moved into even more extreme backwardation. Below is what James Turk had to say in this powerful interview.
Turk: “So far gold is doing exactly what we discussed last week, Eric. Gold is forming a “V” bottom, which is absolutely the best thing that can happen to gold in the short-term….
Continue reading the James Turk interview below…
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If this “V” bottom continues to form, it will signal a key trend reversal. In other words, it will mark an end to the correction in gold that began three years ago.
The extreme backwardation prevailing in gold is finally having the result that could be expected – the gold price is rising. A higher price was inevitable because the backwardation is telling us that the demand for physical metal is greater than available supply.
In other words, there is a clear arbitrage today to make easy money, but the big players are leaving this money on the table. By selling physical metal today, it is possible to profit in three ways:
- 1) Lock in a forward contract to buy gold back in the future at a lower price.
- 2) Avoid storage costs because you have sold your physical metal, and…
- 3) Have the use of the proceeds from your sale until you need to pay a number of months in the future for delivery under your forward contract.
But none of the big players who own physical gold want this ‘free’ money. They would rather own the physical metal than rely on some promise to have metal returned to them in the future. This point is important because it implies that confidence in paper money is shrinking along with the purchasing power of paper money.
Given that confidence is the only thing that keeps paper money afloat, once confidence is lost, the paper currency is doomed. The collapse of dozens and dozens of national currencies since the end of World War II clearly shows that even government force cannot keep a bad currency in circulation.
Gold is now more than $50 above the $1130 price it touched less than two weeks ago. That’s a 4.4% jump in just seven trading days, which is quite remarkable. It is also really remarkable that gold has surged on two Fridays in a row. It has been a long time since that happened. The message we can take from this market action on Fridays is that the shorts are on a hair-trigger. They are ready to run for the exits.
It takes guts to be short gold over a weekend because there is always the possibility that when you wake up Monday morning, there will be some announcement from a central planner or some other world-shaking news that is bullish for gold. We actually got a hint of that today.
Bloomberg quoted ECB Executive Board member Yves Mersch saying that the ECB’s proposed €1 trillion QE program could include buying gold. He said he was talking “theoretically.” but what if one of these Mondays the ECB actually announces a gold buying program as part of it efforts to inflate away the purchasing power of the euro to ease the repayment burden on over-indebted governments. Or consider what might happen on Monday, December 1st if the Swiss government announces that the Swiss Gold Initiative was voted into law.
So it is always very risky to be short gold, but particularly over a weekend. So no doubt the shorts are nervous, but remember, Eric, there are two types of gold shorts: First, there are those who are betting on a lower price, which is the type of short that dominates the price action on the Comex.
The other type of short is the owner of paper gold, dependent upon some promise to have physical metal delivered at some future date. What is really interesting now is that it is this latter group of owners of paper-gold who are the really nervous shorts, which leads me to the really good news, Eric: Even with that huge surge in the gold price over the past several days, the backwardation today is even deeper. More importantly, it stretches out for delivery contracts six months forward, which is exceptionally rare.
Physical metal is in really tight supply at these prices. The market is easily absorbing the eight tons of newly mined metal brought to the market each day.
The only way to eliminate the backwardation is for the price of gold to rise to entice holders of physical metal to sell their metal and hold some national currency instead. But as a consequence of the correction in the gold price that has lasted for over three years, it is safe to assume that everybody who wanted to sell has done so.
So the weak hands are out of the market, and the strong hands now owning physical gold understand how undervalued gold is at these prices. The strong hands are the dominant force today, and they not going to be enticed out of their metal at these prices. This bodes well for the next few weeks as the shorts move toward yearend book squaring.”
UPDATE – KWN has many more interviews being released today.
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