"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Sunday, September 22, 2013

GLD compared to Comex Gold Futures

In response to those who dismiss the idea that GLD is a measure of Western investor sentiment towards gold and therefore as such has little if anything to do with the price of gold, I present the following composite price chart as an illustration.

Please note that this chart shows the MONTHLY CLOSING PRICE only and therefore eliminates a lot of the daily "noise". Can any objective, unbiased observer of these two plotted lines state that the two lines are NOT IN PERFECT SYNC? They both rise together- they both fall together. If instead of plotting the two lines on separate scales for comparison's ease, I overlay the two price plots using no scale, the lines become indistinguishable from one another.

Keep in mind that I have no desire to enter into any discussions or arguments either pro or con as to the theory that gold is being withdrawn from GLD in order to meet higher demand in Asia and to take advantage of the higher premiums on gold in that region of very strong offtake of the physical metal. That may or may not be true. As a trader, speculation such as this does not particularly interest me as it is useless when forming an approach to a market in which one wishes to trade. Buying a market based on hunches, guesses, theories, hearsay, etc., is a very quick path towards ruin for any trader unless one has extremely deep pockets and is quite content to absorb potentially large losses.

To make money as a trader, one needs to understand market sentiment. Market sentiment is gauged by price action as well as studying the positioning of traders against with one is competing in this Zero Sum business.

My theory in trading is the KISS rule. Keep It Simple Stupid. I find it ironic to say the least that when gold was moving on to make new all time highs, and when GLD was reporting new record tonnage amounts nearly every day, we did not hear a peep out of anyone suggesting that the build in GLD reported holdings was in anywhere a bearish development. Quite the contrary; nearly everyone that I am aware of pointed to the surge in GLD holdings as evidence of superb investor demand for gold. I distinctly recall reading breathless reports about how GLD was eclipsing individual nations as one of the largest holders of gold. All of this was excitedly detailed as strongly bullish for the metal.

Now as the reported inventory of GLD shrinks we are also told by many of these same pundits that someone this too is bullish for gold because it indicates strong demand for gold, this time in Asia. Seriously folks, it seems that no matter what the holdings of GLD are, whether they are rising or whether they are falling, that it is always a bullish development! "Heads - I win; Tails - You lose".

All that I am saying is that when the price of gold was rising and moving into new all time highs, the reported holdings of GLD were rising right along with it. As the price of gold has fallen, the reported holdings of GLD have been falling right along with it. While there is no doubt in my mind that the gold being held in GLD has been sold to SOMEONE, the facts are that the reported holdings are sinking.

Since we know that Asia loves physical gold and the West seems to love paper gold, it is obvious that a large chunk of this gold has evidently moved from West to East as the inventory of GLD has been drawn down. This simply proves my point that GLD is a measure of WESTERN INVESTMENT DEMAND for gold and that currently, that demand is falling off as the large hedge funds are buying equities for return and not gold.

Is it not obvious from looking at the Commitment of Traders reports that the big Managed Money accounts are not building the kind of massive long positions that they once were back when gold was soaring into new record highs? Is it also not a fact that this same group of hedge funds has been adopting a more negative tone towards gold based on a  study of their overall short positions?

They may or may not be correct in their assessment from a longer term point of view but our modern markets have by nature become much more short-term oriented whether we like it or not.

Until I see something in the inventory of GLD that indicates GROWTH of their holdings and something on  the Commitment of Traders reports that indicates a solid shift towards a more strongly bullish view in regards to gold by the hedge fund crowd, and until I see a surge upward through overhead chart resistance in the HUI and among the various mining stocks that comprise that index, I have to go with my current assessment that Western investment demand for gold is lagging. As I have stated before, all of this could change at the drop of a hat. Those of us who have a bullish long term view towards gold will be vindicated and hopefully rewarded for our convictions but for the immediate time being, we still lack a catalyst for a sustained upward move in gold until we see some evidence on the charts that this has indeed taken place.

Lastly, for those who want to dismiss anything related to the Comex or to GLD as to having any real connection to the price of the physical metal, I would remind you that many may feel the same exact way, but until the MAJORITY of investors/traders come around to that point of view, railing against the chief barometers used by that sizeable majority will not cause a shift in the current ambivalence towards gold held by the Western investment crowd. Old habits die hard especially in the realm of investing. If you have any doubt about that, just consider the amount of money that large Western investment crowd has made by "NOT FIGHTING THE FED" even though there is a growing number of analysts who see the stock market rise as nothing but a massive bubble blown by 5 years of QE.

Fight the good fight in the meantime, continue to extol the wisdom of holding physical gold against the inevitable but do not be under any illusions about "the herd's" capacity to be irrational for longer than nearly anyone could have expected. It is the LOSS OF CONFIDENCE in the ability of the Monetary Authorities to keep this house of cards supported that will bring back Western buying into all things gold. We mortals have no way of knowing when that will occur but we will certainly recognize it when it does.