The Really Useful Gold Thread

MY LATEST missive, as posted on

GOLD anti-hedgers are wrong

Posted By: energyi
Date: 12/28/2002 at 04:45:28

NOT WHAT THEY SAID it would be
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Some Gold Bulls were saying that a rise in POG over $330 would touch off a "short-covering orgy" on the part of Commercial participants in the Gold market. And that would cause Gold to rocket to $350, $400, or higher as the likes of JPMorgan covered their huge naked short positions.

More sober market observers said that prices could rise, but not without Dollar weakness, and even then the rise in the POG would be capped when Hedge Funds had reached their fill of gold. Well, we may be getting close to (or even have reached) the satiation point.

Why do I say this?
Take a look at the COT figures. Commercials have not covered shorts.
They have continued to increase their Net Short position as the POG rose.
To me, this is completely sensible, and is not a conspiricy in action.
With Gold at/near $350, suddenly certain Gold reserves become economic
that were not economic before. It is quite sensible to hedge a portion
of these newly-economic reserves, sufficienmt to raise bank loans to
develop them, while the price is high. This new hedging activity, conducted
through the banks, with a portion of it ultimately hedged in the futures
market would explain the increased Commercial shorts.

Some knee-jerk anti-hedgers may say this is a bad thing.
But I can tell you, if I was running a mining company, I would certainly
think it was a sensible thing to hedge 20-30-40% of my new reserves (but
not 100%) in order to have the certainty that my company would have
sufficient cash flow to repay the bank loans to develop those new reserves.

The next thing we will see, in the new year, is companies (like Barrick, for example) announcing big jumps in their Gold reserves as they use $330
or $350 as the cutoff figure for what is economic, rather than the $300 or whatever they used last year.

So who pushed up the POG?
Hedge Funds, who have increased their gold futures holdings to almost $2 billion (actual: $1,964 mn., see COT thread). There are now 97 Large Specs. holding long positions in Gold. That is a record $20.25 mn per average Fund. This is well above the previous peak of about $15 mn per
fund, and underscores the vulnerability of the gold market. If the Funds were to decide to lock-in some of their profits on Gold, the price could fall far and fast, as support levels are taken out and selling begets selling. This may be triggered by a sudden bout of strength in the US Dollar, which is now very oversold and due for a bounce. Look for it early in the New Year, a time of some seasonal strength in the dollar, I think.

If the selling is strong enough, it could even push Gold below expected support at $320-325. Do not rule out a drop to $300 or lower.

Be careful in believing the distorted market views of the GATA-inspired "anti-hedging brigade." If the POG collapses to the $250 or even $200 talked about by some Elliott-wavers, some otherwise fine companies that failed to hedge will go bust or get taken over for a pittance. I do not rule out these very low prices, because "Anything can happen". And I know these doctrinaire anti-hedgers are ultimately dangerous for trying to effectively blackmail companies into closing shorts by talking down their hedging activities.