I’ve mentioned in this blog before that I feel that the price of gold is kept low through market manipulation. That conclusion seems to be the only one that makes sense given the difference in price between the COMEX spot price of gold (currently $725) and the ebay price of one-ounce gold coins (currently $940-950). As previously mentioned, the main difference between these two markets is that Ebay is a market place where buyers and sellers are getting together to exchange the physical metal coins, whereas the COMEX markets are where buyers and sellers are getting together to exchange paper claims to gold. Ideally, there should be no difference, but since I can sell a paper claim without actually having the metal itself to sell, I could theoretically flood the market with paper claims to gold to depress the price. The one catch is that the buyer has the option of notifying the seller that he would like to take physical possession of the contracted gold, at which point the seller must provide the physical stuff.
According to COMEX, it has 5 million ounces of gold in it’s possession, whereas 18 million ounces are currently contracted for December delivery. Typically this isn’t a problem because COMEX is a traders market and traders hardly, if ever, take physical delivery but are instead content to settle up with the dollar difference between the buy and the sell. But current market situations present a unique arbitrage situation. Arbitrage, is where there is a price discrepancy between two different markets for the same good. If the price is large enough, then all one would have to do is buy the good in the cheaper market and sell it for a profit in the more expensive one. What if someone did that with gold?
When someone places a “short trade” they are selling something in the hopes of buying it in the future. If the short sale has not properly borrowed the asset they are selling then they are, in essence, just hoping that the buyer won’t ask for it before the seller places the buy order to cover their original short sale. What can sometimes happen is that the short sellers create more open orders for something than they can comfortably get their hands on because someone else is actually buying up all the open interest. When that happens, the price of the object in question keeps going up and the short sellers suddenly must scramble to buy whatever the object in question is to cover their shorts and they come to find that there simply aren’t enough available to fulfill all the short orders that needs covering. This is called a “short squeeze” and the result is that the short seller ends up broke as the holders of the object can name their price to the short seller who now must look to them to cover his short.
A short squeeze on gold is the stuff of legend. The last time the a corner on the gold market was even attempted was in September of 1869, when then infamous “robber baron” Jay Gould lead an conspiracy of financiers to ruin in the attempt (which you can read more about in Dark Genius of Wall Street: The Misunderstood Life of Jay Gould, King of the Robber Barons). In fact, when I bring up the idea of such an event happening, most people seem to dismiss the idea of a replay of the Hunt’s attempt in the early 1980s. The key difference here is an attempt is not being made to corner the entire world gold market, but rather just to squeeze the shorts on the COMEX who have promised to deliver far more gold than they could ever lay their hands on.
The traditional problem with attempted corners is that, if the attempt does not pay off you have a lot of over leveraged parties who have to unwind all of their buy positions which causes the market to fall ever faster back towards the old price. But, in this case, there would be no reason to sell your long positions (i.e. your buys) because you could simply take physical delivery and see it on the physical market; that is, you’re showing a profit by way of the buy anyway, and if it results in a short squeeze that hugely jacks up the price of gold, so much the better.
This idea has been floating around the internet lately and MSN’s Professor Lewis has indicated recently that early signs of a short squeeze brewing are starting to crop up. The biggest indicator Dr. Lewis points to is that the gold leasing rates are starting to shoot up (an indication that banks are increasingly unwilling to loan out their gold). These rates have not come down as the central banks of the world have extended credit to the banks, which indicates that it’s not just a liquidity issue at stake. A huge up move in the price of gold could be in the works. As a huge holder of Barrick Gold stock (ticker symbol ABX), I must say that that would make a very welcome Christmas present indeed.
7 thoughts on “All I Want for Christmas is a Gold Short Squeeze”
I’m with you, Preston. My main holding is GLD which is down since I bought in but I’m confident that it won’t be down for long.
Glad to see you here. I’m not a financial professional, and I’ve not been briefed on your specific information, so I can not legally render any specific investment advice. That being said, my problem with GLD is that it represents paper claims to gold. Sure, GLD is supposed to have gold in their vault with your name on it (figuratively), but Morgan Stanley was billing its clients under the premise that they were holding silver in their vault on their behalf when, in reality, there was none. (http://www.reuters.com/article/fundsFundsNews/idUSN1228014520070612)
I’ve decided to go with Barrick Gold because I feel it’s trading at a very low PE (11.5 today), they are paying dividends, have a strong balance sheet, and are poised to make a killing as the price of gold goes back up. Now stock in gold mining companies does not offer the security of physical gold in hand, but then again neither does an ETF. Just something to consider.
I don’t disagree. In fact, I’m opening an account with the Perth Mint in Australia and plan to hold my gold there (soon) rather than in the ETF. It will be harder for the government to get their hands on it if and when they outlaw tbe private possesion of Gold as they did in the 30’s. Still holding out for a ‘Merry Xmas’ !
Thank-you Preston for a very concise explanation of the mechanics of the eventual Comex short squeeze.
Glad you liked it Piers.