i stock Analyst
Thursday, Oct 16, 2008
I just read a letter from Dan Norcini that really nails whats going on with the Comex spot price.
I have always found it interesting to watch the price get hammered down, each morning, at exactly the same time, every single day.
It is the most bizarre thing to watch.
More and more often, experienced traders are coming to the same conclusion “that just isnt normal market behavior”.
If its not normal market behavior, what else could it be? I will let you come to your own conclusions on that one.
(Article continues below)
Comex is NOT the gold market. It is a paper market which has been the recipient of large speculative buys by commodity index funds. These funds take large positions in an entire gamut of commodities based on the weightings of those particular commodities in the various commodity indices that they use as a benchmark.
It some cases it might be the Goldman Sachs commodity index. In others it is the Reuters/Jefferies CRB index; it still others it is the Dow Jones Commodity Index. That means they buy gold, silver, crude oil, corn, wheat, nat gas, sugar… etc… in the same percentage terms as they are weighted in those indices. For example, if the weighting in one of these indices for gold happens to be 5%, then for every million dollars of client money invested, they are required to buy $50,000 worth of gold futures contracts at the Comex.
When these funds get redemption requests from clients, who now want out of the commodity sector, they are forced to sell FUTURES across the board to generate the cash needed to send back to their clients. That is why, for the most part, the entire commodity complex is sinking whether it is corn or soybeans or wheat or platinum, etc. If $20 million of cash is required to meet client redemption requests, then $20 million of commodity futures must be sold REGARDLESS OF THE FUNDAMENTALS IN THAT PARTICULAR MARKET. In other words, it is FORCED liquidation on account of redemption requests. That has NOTHING TO DO with the real physical gold market where demand remains at unprecedented levels, levels so high that it is producing serious shortages of bullion for would-be buyers.
This is what is producing the increasing dichotomy between the Comex and the real gold market. I would go as far as saying that we are for all practical purposes seeing a BLACK MARKET in gold beginning to develop.
Having said all that, it should still be noted however that while every single commodity futures market is in the red today on account of this forced selling, GOLD IS STILL RELATIVELY STABLE! Hey, you dimwitted pundits who keep pooh-poohing the yellow metal?s safe haven status because it is not trading at $1000, take note.
Even in spite of the forced liquidation, gold is hanging in there precisely because there are enough buyers to offset a great deal of this continued forced liquidation.
This article was posted: Thursday, October 16, 2008 at 10:23 am