A Thin Thin Market

Friday 18th May 2001, saw the largest single day move in gold since the signing of the Washington Agreement back in September 1999, driving gold to its highest levels in 9 months. Today, Monday, 21st, the market is up another $9.00, over $290 per oz.

A Thin Thin Market

Why the sudden interest in gold? Any reader that regularly reads this Update would be aware of the massive physical short positions within both the silver and gold markets.

THE TICKING TIME BOMB
Reliable sources within Comex reported that Friday’s buying was mostly institutional (financial institutions covering their short positions).

There are many reasons why the gold market could very quickly move up from here.

1) Delta Hedging; financial institutions carry massive amounts of derivative contracts on their books. As the price moves up, they must enter the market and buy physical metal to maintain a correct Delta Hedge position. The higher the market moves, the faster and more they must buy, in-turn driving the market higher.

2)News of GATA (Gold Anti Trust Action Committee) is spreading throughout the world. Two weeks ago, GATA hosted a high profile summit in South Africa, which received a large amount of publicity, not only within South Africa, but across the entire financial world. People are starting to take GATA, and their claims of high level conclusion in the gold market, seriously. Many eyes, particularly within Europe, are on the legal action of Mr. Reginald Howe in the district court of Massachusetts.

3) Heavy buying from China, India and the Middle East continues to escalate. China has made a commitment to continue to diversify its financial reserves out of US Treasury Paper, into Euros (and apparently gold). Tensions within the Middle East are climbing. The Arab League of nations have been strong buyers of physical gold for a long time. They don’t like trading a diminishing asset (oil) for paper dollars, preferring to hold a tangible asset such as gold.

4) Alan Greenspan. Last week the esteemed Bob Chapman wrote in his Gold Bulletin “our intelligence sources have informed us that Alan Greenspan has given bullion banks until the end of May to clear up their hedging and outstanding gold derivatives positions”. This is significant. If bullion banks have been but under pressure to unwind their dangerous positions, this will spur them into further physical buying (as already covered above). Interestingly both Alan Greenspan personally and several large bullion banks have been cited in Reg Howes complaint before the Boston court. See www.gata.org .

A Thin Market
How does all this effect the investor? As we look at 30 – 40 years of history, we find that the small investor floods into the gold market very quickly when it starts to move up. Unlike other investment classes, people remain on the sidelines waiting, and when the market starts to make $10 – $20 moves in a day, everyone tries to rush in at once, further driving the market to extreme levels very quickly. The one thing to remember is that the physical gold market today is very small and thin. As Franklin Sanders has said, “not everyone can enter the market at the one time”.

The best advise has always been “be positioned before the big move.”

by Philip Judge
2001