The Remarkable Resiliency Of Gold And Silver

The Remarkable Resiliency Of Gold And Silver by Dave Kranzler for Investment Research Dynamics

The price of gold continues to hold up under the enormous selling in the paper derivatives markets on the Comex and LBMA.  This morning’s price attack is a good example:

The chart above shows December paper gold in 5 minute intervals. Typically the price of gold is taken lower leading up to the a.m. London “fix,” in which the “price fix” process is characterized with heavy offerings.  Lately the price bounces after that. And of course there’s the obligatory price-smack when the Comex floor trading commences (8:20 a.m. EST).  Check that box.  Then the “hey can I tell you the good news” item hit the tape about 4 minutes after the NYSE opened.  The hedge fund algos spiked the S&P 500 futures and dumped paper gold.

For the better part of the last 18 years, when this type of “market” action occurs, gold is down for the count. Not only does the initial “fishing line” sell-off hold, but the gold price moves lower throughout the day.  This snap-back action in the gold price after a price attack since early June is unique to the way gold (and silver) has traded over the last 18+ years.

Gold is at or near an all-time in most fiat paper currencies except the dollar. This summer, however, it would appear that the dollar-based valuation of gold is starting to break the “shackles” of official intervention and is beginning to reflect the underlying fundamentals.  On the assumption that gold can continue to withstand serious efforts to push the price back below $1500 (the net short position in gold futures held by Comex banks is near a record high, for instance), we could see $1600 or higher before Labor Day weekend.

This price-action in gold is being driven by enormous flows of capital into both physical gold and gold “surrogates” or “derivatives.”  Yes, GLD is a derivative of gold – a device used to index the price movement in gold.  The action over the last two months is more remarkable given that the increased excise tax on bullion imports into India have largely stifled import demand beyond what gets smuggled into the country (in excess of 300 tonnes annually).

I have been told my someone who claims to be in a position to know that there’s a buyer of massive amounts of physical gold and silver on every dip in price and that’s what is driving the resiliency of the precious metals.

Make no mistake, even if by chance of a miracle a “trade agreement” is reached between China and the U.S., the underlying economic fundamentals globally have already deteriorated into a recession. And it’s getting worse. It has nothing to do with tariffs.  For the primary cause, research the amount of debt outstanding now vs.  2008…

Moreover, the randomness of unforeseen news events causing sudden market sell-offs and precious metals rallies is starting to occur with greater frequency. This is driving the flight-to-safety move into the precious metals. The mining stocks have lagged relative to the risk-adjusted percentage move since early June in gold and silver. I do not expect that to last for long…

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Dave Kranzler

I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics. Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund.